By Ananda Roy, Senior Vice President, Strategic Growth Insights, IRI International
Inflation is growing across the world’s biggest economies and is set to get worse. The US Bureau of Labor Statistics announced in February that the consumer price index rose year on year by 7.5% in January, while in the UK, inflation hit a 30 year high of 5.5%. In the Eurozone, it hit 5.1% in January.
While inflation dropped during the pandemic, as consumption dropped, it is now rising rapidly. FMCG (fast moving consumer goods) manufacturers and retailers are trying to maintain volume, margin and growth, and are already increasing prices, or are planning to at some stage this year.
This is not the first inflation we have seen and it certainly won’t be the last. But it is very different as IRI’s recent analysis of what we are calling an ‘imperfect inflation’ – ‘Beyond the Headlines: A different mindset for a different inflation’ – shows.
We are seeing a major convergence of supply and demand factors that we have not witnessed for nearly a hundred years, including rising commodity and energy prices, supply chain disruptions, rising shipping costs, labour gaps, unseasonable weather, and, in some markets, the end of government support. There are always rises and falls of course, but when they become so volatile this is a problem.
With slow recovery from the pandemic and a drop in consumer confidence (and subsequent drop in consumer spending) many food and drink manufacturers and retailers are still trying to repair the damage from the 2008/9 recession, so this inflation is extremely unwelcome. Worryingly, we are also seeing a widening gap between rich and poor as wages remain stagnant and interest rates go up.
Learning from past inflations
Looking at past inflationary events, we can begin to understand how sustained inflation can affect consumer choices depending on income and based on price sensitivity and perceived value.
FMCG manufacturers and retailers have tended to respond to this by applying well-established revenue and price management principles. But with people evaluating where they shop, how much they spend, how often they buy and consume, and whether to uptrade, defer a purchase or even to leave a category altogether, brands need to better understand changing needs and behaviours.
They will need to adopt a different mindset and new approach to mitigate the pressures of a very different inflation. Despite inflationary pressures, they have an opportunity to apply other techniques to maintain or increase revenue beyond established methods.
As part of our inflation study, IRI analysed 40 high performing FMCG brands that have successfully mitigated past inflations to reveal the key characteristics of inflation-busting brands, and to show manufacturers how they can be more resilient within their categories. We boiled these characteristics into three key areas:
Target consumers with greater precision
High performing brands think of inflation as an opportunity because consumers are actively re-evaluating their consumption habits and their relationship with brands.
They invest in understanding changing needs and behaviours that are likely to shift demand and offer growth opportunities. They also re-align their marketing portfolio, pricing, distribution, revenue management, and brand mix to ensure they are in the right markets with the right product at the right price.
Successful brands also ‘invest in the trough’ by adapting in the short term, but staying consistent in the long term. This may include counter-intuitive behaviour such as reducing the amount of innovation and investing that part of the marketing budget in trade promotions (while phasing in innovation for the recovery). It may also include partnering with other businesses and even rivals on transportation and distribution, for example, in order to cut costs. Ultimately, they never compromise on the brand promise – quality, trust, ethics and sustainability goals are not replaceable.
All brands are equally vulnerable
High performing FMCG brands recognise that Premium, Mainstream and Private Label are all equally vulnerable to the effects of inflation and recession. This could include price increases due to unpredictable factors, the threat of price wars, consumer up-trading or down-trading, and lack of availability in the right stores.
Shoppers react to ‘sticker shock’
We also found that shoppers are less likely to react to marginal price increases and more likely to react to so-called ‘sticker shock’, such as big price hikes at the forecourt or rising energy bills. This reflects the gap between headline inflation rates and forecasts and actual changes in consumer purchase and consumption behaviour.
Our analysis included a survey of 3,000 consumers across 12 markets, which shows that 68% of shoppers feel their personal finances will be significantly or somewhat better off, despite the vast majority (91%) accepting that prices will rise.
It is interesting to see that shoppers in-store may be too embarrassed to return items once they get to the till and discover they have spent too much. But they will change their behaviour next time they shop, either buying less, looking for deals and offers, or switching to another retailer. With more shopping online, it is easier to manage spending and make adjustments to stay within budget without embarrassment.
To learn more about IRI’s inflation analysis and to access the on-demand webinar ‘Beyond the Headlines: An Imperfect Inflation’,
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