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Opinion: How Grocery Retailers Can Win as Inflation Accelerates
Yesterday's pricing and promotion strategies won't deliver the value that today's consumers seek, writes Kevin Sterneckert. Attempting to use the same business practices of the past will not deliver the value that today's increasingly price-sensitive customers seek, writes grocery industry veteran Kevin Sterneckert.
4 Min Read
Photograph: Shutterstock
The headlines around the world on the economy, inflation, and possible food shortages in Europe and Africa are rightfully concerning. In the U.S., the latest Consumer Price Index (CPI) report notes that grocery prices were up 8.6% year over year in February—a 40-year high. A number of grocery staples saw prices climb at an even faster rate: Beef prices at retail were up 16.2% year over year in February, and prices for both eggs and milk were up more than 11%.
After months of accelerating inflation, consumers are increasingly price-sensitive, and there are signs their shopping behavior is primed to change. This isn't the time for retailers to bury their heads in the sand or revert to the old, familiar playbook of raising prices across the board. In a recent survey for a report on retail pricing from DemandTec in partnership with Miami-based Retail Systems Research (RSR), a large majority of top retailers globally (82%) said they see AI as essential to help drive business improvements. More than half (54%) said they are using AI for pricing and promotions (54%), and nearly half (48%) said they're using AI for assortment decisions.
While rising costs are affecting all retailers, the way these costs are passed along to consumers will impact retailers in five ways:
Consumers will change their buying behaviors. Consumer demand science shows that when an item is either out of stock or the price is higher than the perceived value, different purchase decisions will occur.
Pro Advice: Retailers need to be able to identify and understand which alternatives consumers turn to when their preferred item is out of stock or deemed not worth the price on that visit. Once these are known, feed your forecast and replenishment system accordingly with demand increases/decreases to avoid inventory issues.
Private brands are positioned for explosive growth. The quality and value offered by retailers through their private brands is appealing; however, consumers may still need encouragement to try private-brand products.
Pro Advice: Demonstrate your private brands—consumers will appreciate the opportunity to try new products. Additionally, be willing to challenge traditional private-brand price strategies. Your private brands may warrant higher prices. If the price of a private-brand item is too low, consumers may perceive it to be of low quality.
Use price elasticity to your advantage. While the costs of items in a given category likely are rising at the same rate and your competitors may be passing along the entire cost increase to the consumer, winning retailers will deliver precision pricing and differentiation to their customers.
Pro Advice: With updated store/SKU price elasticity data in hand through AI-powered software, you can hold back on passing the full cost change for items that are highly price-sensitive in the consumer’s eyes and make up the margin on items that are far less price-sensitive.
Promote items based on current consumer demand. The items promoted at this time last year will not perform the same way today. We were not experiencing record inflation and record gas prices at this time last year.
Pro Advice: Leverage AI-powered promotion software that identifies and recommends the best items to promote. Your customers may be experiencing extreme change, and winning retailers will change, as well, to offer more-relevant items and better prices through promotions.
Collaborate with your trading partners to design offers and promotions and effectively allocate trade spend that will deliver relief to your consumers.
Pro Advice: Your trading partners have the same objective: Sell more to more consumers. Conduct top-to-top meetings with your trading partners and map out a plan that improves the way you work together and how you deliver value to the consumer. If you identify a need for an improved trading platform, look to invest now: The future is not going to be easier.
Given that change is affecting all of us, attempting to use the same business practices of the past will not deliver the value your customers seek. The biggest retailers and those that are winning more share of wallet will look and act different from the rest. Today is the time to think differently and be truly different to keep your current customers coming back and win new ones.
Kevin Sterneckert, a 35-year retail technology veteran, is chief strategy officer at Auburn, Calif.-based DemandTec by Acoustic. Previously, Sterneckert was chief marketing officer at Symphony RetailAI; he also has held leadership roles in pricing, merchandising and strategic planning at retailers including HEB, Walmart and Big V Supermarkets.
