// . //  Insights //  Price And Margins In Times Of Inflation

Europe and North America are being hit by pervasive inflation for the first time in decades, and retailers need to figure out how to cope with it. Inflation has long been a feature of South American economies, so we invited Arnaud Dusaintpère, former Senior Commercial Director for Food at Carrefour Brazil, to explain the challenges inflation throws up and how he dealt with them.

Arnaud, who is now a São Paulo-based Partner of Oliver Wyman, talked to Rainer Münch, a Partner and Head of Retail and Consumer Goods practice in Europe.

Businesses in Europe and North America now need to learn how to operate in an inflationary environment. You’ve been dealing with one for some time already in Latin America. Can you tell us what impact inflation has on a retailer?

Consumer price inflation in Brazil rose above 10% in 2021, after being in the range of 4% to 6% per year over the previous years. For perishables, inflation skyrocketed to 20%, and prices in some categories were up 30% or more. At the same time, the average disposable income per capita dropped by 10%, reaching the lowest value in reais of the last decade. Stated differently, consumers have less money in their pockets to buy food that is getting more expensive every day. For grocers, inflation creates a short-term positive effect on revenues, but they face a significant medium-term challenge in maintaining a healthy price image, customer traffic, volumes, and eventually cash margin.

How have these pressures changed shopping habits? And what commercial levers did you pull to protect your price image and margins?

You can often get useful insights by observing consumer behavior. How do shoppers provide their family with the same units of food, when their usual basket has gone up 20% in price? They switch brands, look for cheaper sources of protein, and chase promotions. Eventually they look at other retailers and formats.

A first step for a retailer trying to protect volumes and its client base is to mobilize the commercial team and challenge every cost increase proposed by suppliers. There are several effective ways: conducting a robust negotiation process, using analytical reports, cost benchmarking products across different regions, and holding auctions for selected common commodities and protein sources. Sometimes these efforts will even point to opportunities to pay less to suppliers. Where possible, you can anticipate short-term price increases and place bets by buying up stock in advance. Then you can have better store prices than the competition over the following months while controlling margin impact.

However, in an inflationary environment, you cannot resist passing on part of the price increases to the end-customers, especially in perishables. It would be naïve to say you won’t. Still, a 10% cost increase does not necessarily mean that you must compensate by raising the retail price by 10% too. It may be better to raise this final price by only, say, the same cash amount as the buying cost – a smaller percentage rise.

Do these measures go far enough in a time of high inflation?

Definitely not. Consumers switch between brands, between levels of quality, and even between categories, for example changing from red meat to chicken or eggs. This points to assortment as a powerful lever of price image. Several years ago, Carrefour Brazil decided to invest in a private label – our own brand of products. The aims were to differentiate Carrefour in a market dominated by national brands and to offer consumers the best value for money. We made it a strategic pillar of our commercial strategy and of our proposition to clients.

Carrefour private label products are designed to match the quality of the category leader at a discount in the range of 20% to 30%. Even though the private label was also hit by cost inflation, the price differential made it especially attractive to consumers who wanted to pay lower prices without losing much on quality. By increasing the share of our private label in their baskets, consumers can dampen the impact of inflation. The private label also creates a bond with the banner, as these products are available only at Carrefour. Internal studies showed that this created true loyalty and increased Carrefour’s share of consumer wallets. In addition, the private label does not need price promotions, given its permanent competitive price point. This simplifies price management and contributes to the store’s price image in the long term.

Another assortment lever to help consumers control basket inflation without impacting margin is to double down on regional and local products. Because they are local, and often produced by small- and medium-sized producers, such products have lower logistics and marketing costs, good brand loyalty among consumers, and often healthier margins. They also differentiate the store and contribute economically to local communities.

An initiative we started a couple of years ago turned out to be very relevant in the inflationary context, especially for perishables. We labeled these products “únicos – unique” in our stores. These are vegetables with minor visual flaws which do not alter the quality, flavor, or freshness. We buy them at lower prices and in turn sell them for 20% less than equivalent conventional products. This is good for suppliers and for consumers. It preserves our margin as a retailer. And it is good for the environment, as these vegetables might otherwise go to waste.

How does inflation impact supplier negotiations?

As I said, at some stage, you will have to accept cost increases when they are justified, because otherwise there’s a risk a supplier might stop shipping products to you. As in any negotiation, it’s important to have an understanding of the facts, at the right level of granularity, and to get the math right. A 40% increase in the cost of plastic does not necessarily imply a 40% increase in the price of shampoo. Packaging or raw material increases are one thing – and their contribution to the total cost of production is something else. Knowing what’s behind the products you buy is key. This might sound basic, but it can make a significant difference when negotiating in inflationary times. And the more you work on your private label, the better you will understand the costs of making products.

About Arnaud Dusaintpère

Dusaintpère led Carrefour France’s Multiformat Pricing and Commercial Analytics team for three years and then spent the last five years at Carrefour Brazil – first leading and restructuring its Pricing, Commercial Analytics, CRM, and Innovation activities and then as Senior Commercial Director for Food. He is now a Partner in Oliver Wyman’s Retail and Consumer Goods team, active in the Latin America region.