It can feel like there are few benefits to inflation – especially now, with prices shooting up right across the economy. But the crisis also presents opportunity, no more so than for retailers and industrial goods firms. We examine what firms can do now to use the time to change for the better.
How grocers can win on price in times of inflation
Despite access to ample data and sophisticated pricing tools, many supermarkets fail to set and execute a clear price strategy. Most simply follow competitors. However, by doing so they miss out on an opportunity to fully exploit a huge value lever and maximize their price reputation. This leaves them exposed to discounters – even more so in times of high inflation. Coen de Vjust and Alexander Mol looked at the root causes and why grocers should dare to lead on price in a recent LinkedIn article.
They argue that although most grocery retailers have a lot of the right ingredients in place, not many are able to combine them into a sophisticated pricing approach. Ample data is available: from price elasticity to granular consumer perceptions, and competitor prices. In addition, most retailers typically have a dedicated pricing tool to execute regular price changes. Moreover, a growing number of retailers now have electronic shelf labels, and this opens the door to more frequent, automated price changes and local price differentiation. What is missing is management’s ability or courage to determine how to best distribute the price investments across and within their categories. Pricing strategy usually remains vague and high-level, so execution defaults to ‘damage control’, for example managing a certain price gap vs. competition.
To be successful in these challenging times, it is vital to have a deep understanding of consumers’ psychology around perception of prices. Retailers that understand this can mitigate price perception risk from inflation by making well thought-through decisions on how and where to alter prices
How industrial goods firms can tackle inflation head-on
While we can’t predict inflation, we can broadly understand its root causes. While some inflation is temporary, some is here to stay. Industrial goods companies need to address each type in a different way.
The inflation that results from temporary supply chain shortages (gas, wood, containers, etc.) will reverse over time. What will remain, however, is a strongly increased volatility in commodity prices, at least when it comes to geopolitics. These need to be addressed by risk and margin management techniques; industrial companies need to up their game in these traditionally less developed capabilities.
Some cost inflation is here to stay, however, especially as (partially temporary) price increases work their way through wage and salary increases, further fueling inflation. That vicious circle – a so-called wage spiral – can seriously bite into profits. For example, currently discussed wage increases of 8% - that requested by one of the largest industrial worker unions in Europe – would cost an average industrial goods companies more than 25% of their profit if no action is taken. Industrial companies need to address this type of inflation with more traditional cost management approaches – for example, by building a leaner and more resilient business. With most employers wanting to support their employees the best they can in tough times, that means action now to keep those profit margins healthy.
Firms will need to be leaner and smarter than ever to pivot with the global economy’s many changing demands. Positioning yourself for the future may require some hard thinking now, but it’ll certainly pay off down the lineWolfgang Krenz, Partner and Sector Leader Industrial Goods
Catch-up on previous editions of The Inflation Shift:
Inflation And Resilience: A Tale Of Two Countries
In Vol. 6 of The Inflation Shift, we look at the different challenges and resulting opportunities inflation presents in two very different countries – Germany and Australia.