September 18, 2008
Consumers Don’t Know Why Prices Are Rising
By Bernice Hurst, Managing Partner, Fine Food Network
Consumers reading newspapers
or listening to radio and television broadcasts are probably aware that much
of the world has experienced unusual weather conditions this year. They may
or may not have drawn the conclusion that crops in their own, and other countries,
have been affected. Or that this, in turn, is the reason why food prices are
rising so drastically.
Supermarkets have been trying hard to absorb many of the increases and cushion their customers. In Britain, Mark Price, managing director of Waitrose, optimistically told BBC Radio 4’s Today program that “a combination of a good summer vegetable harvest and a good global wheat harvest would see price reductions on some products and a leveling-off on others.”
The Independent newspaper, however, claimed that this message conflicted with the concerns of farmers unable to harvest cereal crops because the ground was too wet for the heavy equipment necessary for the job. A government ban preventing the use of tractors and other heavy equipment on waterlogged fields was temporarily lifted after the National Farmers’ Union pressured the Department for the Environment, Food & Rural Affairs.
A shortage of honey this year is also anticipated. As discussed on RetailWire a few months back, consumers may not realize that “the poor harvest is symptomatic of a wider malaise,” the Independent reports. This threatens not only the bee colonies but a significant part of food production dependent on crops pollinated by bees.
One fairly typical British beekeeper quoted expects barely a third of his usual production. An overall drop of more than 50 percent across the country has been predicted with one of the UK’s biggest suppliers warning that supermarkets may run out of stock before Christmas. Shortages in other countries have pushed prices up by 60 percent in the last 12 months.
Retailers
may be trying to protect themselves, their suppliers and their customers but
not being open about what is really going on may, in the long term, cause more
dismay and confusion when price rises and shortages continue.
Asda on Tuesday
proclaimed that food inflation had peaked, even as official data showed it
rising at record levels, while also announcing plans to cut prices on more
than 5,000 items this fall.
“Despite today’s record inflation figures I’m confident that food price inflation has peaked and that we are beginning to see the cost of goods stabilize,” Asda’s chief executive Andy Bond said in a statement.
Discussion Questions: Are retailers doing enough to explain shortages and price rises to consumers? Or are they safe to assume that most people have picked up enough from news reports to “get it”? What more can they do to show that they have shoppers’ best interests at heart in challenging times?
[Author’s commentary] In the U.S., like the U.K, there don’t seem to be any in-store communications from supermarkets when prices go up. It’s just kind of a shocker and perhaps more communication about the realities of supply would soften the blow. The link between supermarkets doing what they can to protect shoppers and farmers doing what they can to make a living and produce enough food, may need to be more explicit.
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This is a good time for retailers to fight the price war at higher prices and perhaps get better at segmentation. Retailers should not need to advise customers about economics and the failings of markets. Buyer beware.
Supermarkets don’t need to explain anything. I would think the last thing a supermarket would want to do is to tell consumers that prices have risen. By explaining the reasons for the price increases, the supermarket is only adding more attention to an already negative situation. As a rule of thumb, supermarkets need to limit the number of negative signs, warnings, etc. Stores should emphasize positive images instead. Having supermarkets explain rising prices is like cigarette companies explaining the dangers of smoking. Keep the positive images and bury the negative. Instead of showing why prices have risen, show the consumer that your price is lower than a nearby competitor’s. Make the competitor do all the explaining and make it look like your competitor’s fault.
Had food prices risen in a vaccuum, consumers would have greater need to understand the reason for the increases. But facing the rising cost of gasoline, the downturn in the stock market, food safety scares and a myriad of other causes, consumers are less concerned with the reasons why prices are rising and more concerned with putting food on the table.
One assumes that if supermarkets were to tell consumers that prices are always rising, that it not be emotionally compatible with the best interests of the consumer or increasing sales.
I think the bigger challenge for retailers over the next two years will be DEFLATION. We probably have another quarter of cost increases as manufacturers adjust product prices to reflect ingredient costs in their current output, but then the opposite is going to hit us and this will be much harder for retailers to manage. The “dirty little secret” of rising prices is that the same gross margin yields more operating dollars and retailers are making money selling overstocks at the new prices. As long as wages are not rising and energy costs can be managed, retailers can do pretty well.
Although it has not yet hit the consumer, the fallout from all the current turmoil in the financial markets is going to reduce consumer spending. Credit is becoming harder to obtain and consumers are going to soon have to cut back. We have seen the effect on commodity prices as financial firms have been unable to borrow money to invest in commodity futures and prices of those commodities have dropped. Lower housing values, declining savings value, and less credit will have a significant impact on consumer demand and prices.
This creates a real challenge for retailers, who must now manage inventory much more closely in order to avoid losses. Purchase Orders must include clearly stated stock protection rules, to avoid needing to sell inventory below acquisition cost. It appears energy costs will decline, but retailers that are dealing with high union contracts will not be able to adjust labor costs. But the overhang of commercial real estate may allow them to get better rent terms.
No matter how you look at it, the challenge is going to be getting consumers to continue spending but I don’t think it will be high prices that deters them but rather their own sense of financial health.
I’m not sure how many people really care about the potential rising cost of honey, but they do care about products they need. Basic foods, personal care, liquids to name a few. Consumers know the cost of everything is going up, and yes they really don’t know why. Supermarkets cutting their throats by telling them why isn’t in their best interest, so they haven’t mentioned it.
What consumers would be open to hearing is what are they doing about it to HELP the general public. Lowering a few prices on necessities per week would go a long way towards improving customer relations and driving traffic. Otherwise, the consumer will just go to Walmart where they perceive the prices are still lower–whether true or not.
Retailers need not shout out why prices are rising. Consumers already have a pretty good idea, especially if they just came from filling up their gas tank or paying their utility bill. Consumers know prices fluctuate. They also know that on average they will move up. However, supermarket staff should be schooled in the reasons so they can answer questions clearly and honestly. The reasons have little to do with the individual retailers and they should be prepared not to take the heat.
I have followed some of the food crises arising in other countries–African countries in particular. I also remember reading about the rice shortage, and how even Costco was putting limits on the amount of 5-lb bags of rice that people could buy, in order to prevent hoarding. But I didn’t see any signs like that in my local store.
It’s interesting, though. Even though I’m relatively more active in keeping up with these things than probably the average person is, I didn’t make any connection with food shortages and the price of food that I pay for. I just assumed (in part thanks to media obsession with it) that my prices are a result of rising oil prices.
But that could lead to an interesting challenge that may indeed lead retailers to need to explain the market dynamics to consumers. Because if you go into a grocery store assuming that the recent rise in prices has been due to oil, and you start seeing oil back down around $100/barrel, then you’re going to assume that grocery prices will come down soon. When they don’t, then explanation will be needed that the source of the price increase wasn’t gasoline alone, but supply issues with food, or consumers may believe that retailers are price gouging.
The overall negativity in the media is making difficult for the consumer to absorb and understand the bad news. All we are hearing about is failing banks, foreclosures and other economic maladies, so the customer is a negative mood to begin with. Seeing higher prices on the shelf adds to the pressure. Retailers must communicate these changes in a positive light. Yes bananas are going up in price but look how much you will save on our own brand of paper towel etc.
Ironically, I believe this is a great opportunity to build goodwill with the consumer by showing them that we are in this together (the chain and the customer) and we will do what it takes to get through the economic maelstrom.
I publish a large social networking site for shoppers, and believe me, the commentary there is that they are looking for reasons why the prices are rising, and they are interested in the “why” behind price increases. That knowledge arms them with ways they can combat rising prices and continue to economize their households and free up cash for other areas of their purchasing.
Should the info come from the store? Maybe not – it might not come off as being quite as legitimate, but some level of addressing the issues at the store level would be a good first awareness and drive people out looking for other sources of information.
But it’s tough for consumers to see food companies and stores posting profits and trading at 52-week highs even in spite of the market tanking this week and not wonder what the heck is going on that prices have gone so nutty with no end in sight. The USDA has said to expect higher food prices next year. Consumers do want to better understand it.
Consumers see the reason every day when they pass every gas station. The overwhelming reason for food inflation is directly related to fuel in some way, shape or form.
Dairy, being one of the highest inflation areas is nearly entirely related to the costs associated with fuel. If not directly to fuel itself, it’s related to costs for feed increasing due to rising prices for crops related to ethanol. This raps around to almost everything: bread, grain products, cereal, and think about it – even pizza.
Consumers know. They buy fuel as much as they buy anything. Retailers need not poke them in the eye with telling them about the total on their receipt. They already know it.
I seem to disagree with a lot of panelists. A supermarket can do a lot to educate shoppers about what is rising in costs as well as how the store can help consumers save money. Information can be provided at point of purchase, in circular consumer columns, and on the store website.
Wegmans’ own Mary Ellen Burris’s weekly column comes to mind as an example of a store committed to providing simple, accurate and helpful information to consumers on a wide variety of subjects, including price increases. Their website contains a multitude of information to assist consumers in saving money and buying/convenience ideas. Andrea Astrachan’s column for Giant and Stop&Shop Supermarkets provides similar information and a weekly recipe.
Retailers can pair information with a solution, and say that even though certain items may be rising in price, here is a meal solution that assists the customer in making a meal for 4 for under $10.00. That’s credibility to me.
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This is a good time for retailers to fight the price war at higher prices and perhaps get better at segmentation. Retailers should not need to advise customers about economics and the failings of markets. Buyer beware.
Supermarkets don’t need to explain anything. I would think the last thing a supermarket would want to do is to tell consumers that prices have risen. By explaining the reasons for the price increases, the supermarket is only adding more attention to an already negative situation. As a rule of thumb, supermarkets need to limit the number of negative signs, warnings, etc. Stores should emphasize positive images instead. Having supermarkets explain rising prices is like cigarette companies explaining the dangers of smoking. Keep the positive images and bury the negative. Instead of showing why prices have risen, show the consumer that your price is lower than a nearby competitor’s. Make the competitor do all the explaining and make it look like your competitor’s fault.
Had food prices risen in a vaccuum, consumers would have greater need to understand the reason for the increases. But facing the rising cost of gasoline, the downturn in the stock market, food safety scares and a myriad of other causes, consumers are less concerned with the reasons why prices are rising and more concerned with putting food on the table.
One assumes that if supermarkets were to tell consumers that prices are always rising, that it not be emotionally compatible with the best interests of the consumer or increasing sales.
I think the bigger challenge for retailers over the next two years will be DEFLATION. We probably have another quarter of cost increases as manufacturers adjust product prices to reflect ingredient costs in their current output, but then the opposite is going to hit us and this will be much harder for retailers to manage. The “dirty little secret” of rising prices is that the same gross margin yields more operating dollars and retailers are making money selling overstocks at the new prices. As long as wages are not rising and energy costs can be managed, retailers can do pretty well.
Although it has not yet hit the consumer, the fallout from all the current turmoil in the financial markets is going to reduce consumer spending. Credit is becoming harder to obtain and consumers are going to soon have to cut back. We have seen the effect on commodity prices as financial firms have been unable to borrow money to invest in commodity futures and prices of those commodities have dropped. Lower housing values, declining savings value, and less credit will have a significant impact on consumer demand and prices.
This creates a real challenge for retailers, who must now manage inventory much more closely in order to avoid losses. Purchase Orders must include clearly stated stock protection rules, to avoid needing to sell inventory below acquisition cost. It appears energy costs will decline, but retailers that are dealing with high union contracts will not be able to adjust labor costs. But the overhang of commercial real estate may allow them to get better rent terms.
No matter how you look at it, the challenge is going to be getting consumers to continue spending but I don’t think it will be high prices that deters them but rather their own sense of financial health.
I’m not sure how many people really care about the potential rising cost of honey, but they do care about products they need. Basic foods, personal care, liquids to name a few. Consumers know the cost of everything is going up, and yes they really don’t know why. Supermarkets cutting their throats by telling them why isn’t in their best interest, so they haven’t mentioned it.
What consumers would be open to hearing is what are they doing about it to HELP the general public. Lowering a few prices on necessities per week would go a long way towards improving customer relations and driving traffic. Otherwise, the consumer will just go to Walmart where they perceive the prices are still lower–whether true or not.
Retailers need not shout out why prices are rising. Consumers already have a pretty good idea, especially if they just came from filling up their gas tank or paying their utility bill. Consumers know prices fluctuate. They also know that on average they will move up. However, supermarket staff should be schooled in the reasons so they can answer questions clearly and honestly. The reasons have little to do with the individual retailers and they should be prepared not to take the heat.
I have followed some of the food crises arising in other countries–African countries in particular. I also remember reading about the rice shortage, and how even Costco was putting limits on the amount of 5-lb bags of rice that people could buy, in order to prevent hoarding. But I didn’t see any signs like that in my local store.
It’s interesting, though. Even though I’m relatively more active in keeping up with these things than probably the average person is, I didn’t make any connection with food shortages and the price of food that I pay for. I just assumed (in part thanks to media obsession with it) that my prices are a result of rising oil prices.
But that could lead to an interesting challenge that may indeed lead retailers to need to explain the market dynamics to consumers. Because if you go into a grocery store assuming that the recent rise in prices has been due to oil, and you start seeing oil back down around $100/barrel, then you’re going to assume that grocery prices will come down soon. When they don’t, then explanation will be needed that the source of the price increase wasn’t gasoline alone, but supply issues with food, or consumers may believe that retailers are price gouging.
The overall negativity in the media is making difficult for the consumer to absorb and understand the bad news. All we are hearing about is failing banks, foreclosures and other economic maladies, so the customer is a negative mood to begin with. Seeing higher prices on the shelf adds to the pressure. Retailers must communicate these changes in a positive light. Yes bananas are going up in price but look how much you will save on our own brand of paper towel etc.
Ironically, I believe this is a great opportunity to build goodwill with the consumer by showing them that we are in this together (the chain and the customer) and we will do what it takes to get through the economic maelstrom.
I publish a large social networking site for shoppers, and believe me, the commentary there is that they are looking for reasons why the prices are rising, and they are interested in the “why” behind price increases. That knowledge arms them with ways they can combat rising prices and continue to economize their households and free up cash for other areas of their purchasing.
Should the info come from the store? Maybe not – it might not come off as being quite as legitimate, but some level of addressing the issues at the store level would be a good first awareness and drive people out looking for other sources of information.
But it’s tough for consumers to see food companies and stores posting profits and trading at 52-week highs even in spite of the market tanking this week and not wonder what the heck is going on that prices have gone so nutty with no end in sight. The USDA has said to expect higher food prices next year. Consumers do want to better understand it.
Consumers see the reason every day when they pass every gas station. The overwhelming reason for food inflation is directly related to fuel in some way, shape or form.
Dairy, being one of the highest inflation areas is nearly entirely related to the costs associated with fuel. If not directly to fuel itself, it’s related to costs for feed increasing due to rising prices for crops related to ethanol. This raps around to almost everything: bread, grain products, cereal, and think about it – even pizza.
Consumers know. They buy fuel as much as they buy anything. Retailers need not poke them in the eye with telling them about the total on their receipt. They already know it.
I seem to disagree with a lot of panelists. A supermarket can do a lot to educate shoppers about what is rising in costs as well as how the store can help consumers save money. Information can be provided at point of purchase, in circular consumer columns, and on the store website.
Wegmans’ own Mary Ellen Burris’s weekly column comes to mind as an example of a store committed to providing simple, accurate and helpful information to consumers on a wide variety of subjects, including price increases. Their website contains a multitude of information to assist consumers in saving money and buying/convenience ideas. Andrea Astrachan’s column for Giant and Stop&Shop Supermarkets provides similar information and a weekly recipe.
Retailers can pair information with a solution, and say that even though certain items may be rising in price, here is a meal solution that assists the customer in making a meal for 4 for under $10.00. That’s credibility to me.