January 9, 2009
Retailers Ready to Rumble Over Prices
If we’ve
heard it once, we’ve heard it a couple of dozen times. If gas was the reason
manufacturer prices went up in 2008, retailers and wholesalers are wondering
why they haven’t come back down. Of course, most of
these conversations have been in the background but now industry leaders
such as Supervalu CEO Jeff Noddle are saying publicly that their companies
are ready to do "battle" with manufacturers.
Many food
manufacturers, as a Dow Jones Newswire report points out, have resisted
rolling back prices even as numerous categories have seen declines in unit
volume.
Mr. Noddle told
analysts on a conference call that manufacturers are not likely to give
in unless they see further share erosion to private label or if economic
conditions result in further volume losses.
"I
look at the first six months as being the battleground," he said.
Mr. Noddle expects
that companies such as his will win the fight. "I think they’re (vendors)
going to be forced initially into more trade spending and then ultimately
bringing prices down."
Discussion Questions:
How is the economy affecting the relationship between retailers/wholesalers
and their vendors? Are there valid reasons for manufacturers to be
resisting price cuts? Will the pushback on prices from large companies
such as Supervalu benefit smaller retailers and wholesalers?
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I’m still struck by the damage that manufacturers are doing to their reputation with consumers. Next time you go grocery shopping, stand in the cereal aisle and make a comment on the new miniature boxes, and wait for the torrent of invective from your fellow shoppers….
The poor economy is taking its toll on manufacturers and retailers. Retailers want manufacturers to lower prices without cutting into retail profits. Manufacturers want to hold prices stable to maintain their profits. Everyone has cut package sizes, but not prices. It seems like the only group that has not benefited is consumers.
This is intended to be honest and fair:
For a very long period of time, many manufactures had to “eat” the inflationary gasoline costs and it’s not unlikely that the current deflation in fuel costs could be very temporary.
For manufacturers, the cost of doing business with retailers is at an all time high. Many brands are unable to do business profitably after the excessive fees, allowances, chargebacks, extended terms, and unsolved deductions.
With gasoline prices being lower now, at least temporarily, the newer current prices help to stand as a correction, at least for now. Manufacturers cannot pass along lower costs to retailers until retailers reduce the cost of doing business for manufactures.
Two factors drove up the cost for suppliers. Yes, petroleum costs increased to record levels but the oil companies have been slower in reducing their prices than they were when increasing.
The second factor was commodity costs. Supplier raw material costs have been declining, but due to contract buying it will take longer to get through the system. While distributors are claiming the supplier’s costs have declined, they have not reduced their prices; their perception is ahead of reality. History tells us suppliers will not reduce their price, but will increase deal spending. This is what they did as a response to high inflation during the Nixon era. Forward buyers will never be more profitable.
I second David’s opinion–there were an awful lot of manufacturers who held prices firm against rising commodity prices a lot longer than they really should have, both from retailer pressure and from, I think, the hope that those increases were only temporary or some kind of aberration. When it was clear it was going to linger for at least awhile, manufacturers started changing pack sizes rather than ask for price increases.
Hmmm. I wonder if it would have just been better for retailers to take the price increases and pass them along to consumers. Because the result of changing pack sizes was something close to havoc at retailers–a rash of discontinued items and new introductions of items, which meant tying new items to old items, re-doing planograms, etc, etc.–a pretty big cost to retailers who were trying to avoid costs and resultant higher prices to begin with.
Manufacturers are going to try to hold on to the upside of falling commodity prices as long as they can, and retailers are going to push them to hand over those benefits as quickly as possible. It’s all part of the “retail circle of life”!
At the risk of going too far out on the limb, instead of retailers worrying about reducing the manufacturer’s profits, they should accept the wholesale prices and adjust their prices as they see fit. That’s not to say that they shouldn’t shop for the best deal. The consumer will ultimately decide if the price is right by their purchases. Retailers should spend more of their productive time trying to reduce their own overhead or develop a clear marketing strategy that will differentiate them.
I am reminded of the reaction to the price freezes that were instituted during the Nixon years to combat inflation. When they were able to make price changes again, manufacturers set high list prices and countered them with trade discounts. This allowed them to protect themselves from future freezes while still reaching a certain retail price point.
The challenge we face right now is that no one really knows where costs are going in the future. Some manufacturers have countered rising ingredient costs by downsizing, going back to larger packages would be difficult for them. Other manufacturers have finally raised prices after absorbing higher ingredient costs for a long time.
So flexibility seems to be the answer.
I think what we are going to see is a lot more off-label promotions with manufacturers lowering costs on specific production lots and ensuring the discount reaches consumers by special packaging. Cents-off labeling makes a lot of sense because it emphasizes the manufacturer’s sensitivity to consumer expectations. The consumer sees ingredient prices declining and is expecting the manufacturer to pass them along. What better way to let the consumer know you “feel their pain” than to plaster a big message on the front of your package?
Manufacturers have weathered a decade or more of declining consumer prices, partially driven by off shore sourcing and manufacturing allowing for decreased pricing, but also due to the pressures of retailers in requiring ever more deals.
It is rare, very rare, when the cpg manufacturers get a chance to replenish their coffers and it is unusual for retailers to find themselves in a situation where they have been unable to bend them to their will.
Unemployment hit 7 plus percent this month and consumer spending continues to decline. Retailers are in a battle for their lives and the inevitable outcome is going to be price wars. Their treasuries are already depleted so they are now going to fight to finance these price wars with price decreases from suppliers.
I don’t anticipate that this situation will long prevail but it is interesting to see it play out.
It’s my experience in our industry that the retailers are the ones raising retails…not based on our price increases. They’re refusing price increases and keeping the extra for themselves. The consumer thinks its the manufacturers raising their prices, but it’s not true. The retailer is improving their position by squeezing the manufacturer. But we need them healthy in order to have them not become one of these “dark anchors,” so we’ve tried to accommodate them thus far.
We (the retailers) want to offer the best possible price to our customer without sacrificing too much margin. We’ve already slashed overhead to the absolute bare minimum and the store manager is now working cash and filling the dairy cooler. The next cost control goes to the vendor. If a vendor wants a price increase, they better be showing me line items showing their price increase. This is a two way street and most consumer goods manufacturers are excellent at controlling costs including raw materials via hedging.
It is almost like the laws of supply and demand have gone away and we are just winging it now. Crude prices go up, and we consume more. Incomes and spending go down, vendors want to jack up prices. I’m not really sure how this helps retailing but my experiences would suggest that you want to lower prices to stimulate buying. Vendors should understand that and it’s up to the retailer to react with their buying. As the merchant is the last stop in the buying chain, we get the smallest piece of the pie (although as of late, our plate has virtually been empty).
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I’m still struck by the damage that manufacturers are doing to their reputation with consumers. Next time you go grocery shopping, stand in the cereal aisle and make a comment on the new miniature boxes, and wait for the torrent of invective from your fellow shoppers….
The poor economy is taking its toll on manufacturers and retailers. Retailers want manufacturers to lower prices without cutting into retail profits. Manufacturers want to hold prices stable to maintain their profits. Everyone has cut package sizes, but not prices. It seems like the only group that has not benefited is consumers.
This is intended to be honest and fair:
For a very long period of time, many manufactures had to “eat” the inflationary gasoline costs and it’s not unlikely that the current deflation in fuel costs could be very temporary.
For manufacturers, the cost of doing business with retailers is at an all time high. Many brands are unable to do business profitably after the excessive fees, allowances, chargebacks, extended terms, and unsolved deductions.
With gasoline prices being lower now, at least temporarily, the newer current prices help to stand as a correction, at least for now. Manufacturers cannot pass along lower costs to retailers until retailers reduce the cost of doing business for manufactures.
Two factors drove up the cost for suppliers. Yes, petroleum costs increased to record levels but the oil companies have been slower in reducing their prices than they were when increasing.
The second factor was commodity costs. Supplier raw material costs have been declining, but due to contract buying it will take longer to get through the system. While distributors are claiming the supplier’s costs have declined, they have not reduced their prices; their perception is ahead of reality. History tells us suppliers will not reduce their price, but will increase deal spending. This is what they did as a response to high inflation during the Nixon era. Forward buyers will never be more profitable.
I second David’s opinion–there were an awful lot of manufacturers who held prices firm against rising commodity prices a lot longer than they really should have, both from retailer pressure and from, I think, the hope that those increases were only temporary or some kind of aberration. When it was clear it was going to linger for at least awhile, manufacturers started changing pack sizes rather than ask for price increases.
Hmmm. I wonder if it would have just been better for retailers to take the price increases and pass them along to consumers. Because the result of changing pack sizes was something close to havoc at retailers–a rash of discontinued items and new introductions of items, which meant tying new items to old items, re-doing planograms, etc, etc.–a pretty big cost to retailers who were trying to avoid costs and resultant higher prices to begin with.
Manufacturers are going to try to hold on to the upside of falling commodity prices as long as they can, and retailers are going to push them to hand over those benefits as quickly as possible. It’s all part of the “retail circle of life”!
At the risk of going too far out on the limb, instead of retailers worrying about reducing the manufacturer’s profits, they should accept the wholesale prices and adjust their prices as they see fit. That’s not to say that they shouldn’t shop for the best deal. The consumer will ultimately decide if the price is right by their purchases. Retailers should spend more of their productive time trying to reduce their own overhead or develop a clear marketing strategy that will differentiate them.
I am reminded of the reaction to the price freezes that were instituted during the Nixon years to combat inflation. When they were able to make price changes again, manufacturers set high list prices and countered them with trade discounts. This allowed them to protect themselves from future freezes while still reaching a certain retail price point.
The challenge we face right now is that no one really knows where costs are going in the future. Some manufacturers have countered rising ingredient costs by downsizing, going back to larger packages would be difficult for them. Other manufacturers have finally raised prices after absorbing higher ingredient costs for a long time.
So flexibility seems to be the answer.
I think what we are going to see is a lot more off-label promotions with manufacturers lowering costs on specific production lots and ensuring the discount reaches consumers by special packaging. Cents-off labeling makes a lot of sense because it emphasizes the manufacturer’s sensitivity to consumer expectations. The consumer sees ingredient prices declining and is expecting the manufacturer to pass them along. What better way to let the consumer know you “feel their pain” than to plaster a big message on the front of your package?
Manufacturers have weathered a decade or more of declining consumer prices, partially driven by off shore sourcing and manufacturing allowing for decreased pricing, but also due to the pressures of retailers in requiring ever more deals.
It is rare, very rare, when the cpg manufacturers get a chance to replenish their coffers and it is unusual for retailers to find themselves in a situation where they have been unable to bend them to their will.
Unemployment hit 7 plus percent this month and consumer spending continues to decline. Retailers are in a battle for their lives and the inevitable outcome is going to be price wars. Their treasuries are already depleted so they are now going to fight to finance these price wars with price decreases from suppliers.
I don’t anticipate that this situation will long prevail but it is interesting to see it play out.
It’s my experience in our industry that the retailers are the ones raising retails…not based on our price increases. They’re refusing price increases and keeping the extra for themselves. The consumer thinks its the manufacturers raising their prices, but it’s not true. The retailer is improving their position by squeezing the manufacturer. But we need them healthy in order to have them not become one of these “dark anchors,” so we’ve tried to accommodate them thus far.
We (the retailers) want to offer the best possible price to our customer without sacrificing too much margin. We’ve already slashed overhead to the absolute bare minimum and the store manager is now working cash and filling the dairy cooler. The next cost control goes to the vendor. If a vendor wants a price increase, they better be showing me line items showing their price increase. This is a two way street and most consumer goods manufacturers are excellent at controlling costs including raw materials via hedging.
It is almost like the laws of supply and demand have gone away and we are just winging it now. Crude prices go up, and we consume more. Incomes and spending go down, vendors want to jack up prices. I’m not really sure how this helps retailing but my experiences would suggest that you want to lower prices to stimulate buying. Vendors should understand that and it’s up to the retailer to react with their buying. As the merchant is the last stop in the buying chain, we get the smallest piece of the pie (although as of late, our plate has virtually been empty).