Price increases are a hot topic right now.  We are constantly reading that the cost of the weekly shopping basket is being impacted by a perfect storm of Brexit, inflation, increased transport costs, raw materials shortages, staff shortages and increases on variable production costs such as oil, gas, aluminium. Adding to the mix are sustainability efforts such as the introduction of RPET, legislative pressures including the implementation of Natasha’s Law and the forthcoming HFSS restrictions, not forgetting the ongoing volatility caused by covid.  Wow! Where to begin?

The fact that price increases are a hot topic means that there is an awful lot of noise about them – right through the supply chain, down to the end consumer, we know they are coming, but what to do about it? There is so much noise that it is too easy to get caught up in the complexity when it can probably be distilled down into some quite simple metrics.  So here goes:

TWC recently undertook a small piece of retail price research for our client Unitas.  We were asked to identify any price disparity between Tesco and Sainsbury’s supermarkets and Tesco Express and Sainsbury’s Local convenience stores.  We confirmed on a like for like basis that Tesco Express was an average of 11% more expensive than Tesco superstores and Sainsbury’s Local was 9% more expensive than Sainsburys supermarkets.  This result was to be expected, this is not new news, looking back over decades the price differential between retail convenience and the retail multiples has always been approximately 10%, reflecting the accepted higher cost to serve of convenience stores vs. large supermarkets.

If we accept that a 10% differential between convenience and supermarkets is the rule of thumb, for now, then isn’t it fair to use that as a baseline for setting a minimum convenience retail selling price for priced marked packs in the channel?

Building on this theme, let’s for a moment ignore the rising cost of utilities, transport and raw materials.  Surely, any product’s selling price is ultimately determined by what the consumer will pay for it?  Equally, when it comes to price increases, the same applies – a price can only rise as much as the consumer is willing to accept.  On this basis then, if a supplier is producing an entry level product and another supplier is producing a mid-tier brand, ultimately, they will need to move commensurately to maintain their market position.

Any good supplier will have a strong idea of the price elasticity of its skus (and its competitors), even in a volatile market.  The same good supplier will also have strong cost modelling pre-built to overlay against price elasticity.  So, if determining the right retail selling price is arguably step 1 in any price re-positioning model, then evidencing this to a buyer with data and analytics should probably be step 2.

I have also seen coverage in some of the trade publications about the lengths that some of the buyers in the Multiples are going to in their current price negotiations to see the component costs of a product and to then negotiate a price increase based on which component costs can be squeezed most effectively.  The reality is that this has always been the practice.  Buyers in the Mults have a markedly smaller portfolio than any wholesale buyer (with the former very often responsible for just one sub-category whereas the latter may buy for a whole department).  The Mults buyer therefore has considerably more time to build up category knowledge and to then negotiate individual lines in micro detail than any wholesaler could ever hope for.  Again, cutting through the noise, it is probably correct to assume that, ultimately, the price that Tesco or Sainsbury negotiates for a product is going to be as good as it gets.  Consequently, step 3, as unpalatable as it might be, is probably being led by what the retail multiples accept as a percentage increase.

Then let’s return to the distraction of component costs that comprise things like utilities, wages, taxes and packaging and waste.  Should that be built into the wholesaler’s considerations?  Arguably yes, but the reality is that every part of the supply chain is facing increases so this will have been factored into the price already, trying to build it in again will likely be a double count. I am afraid it is probably better to accept that on a like for like basis, price movement will cover this. It is also worth remembering that the news headlines are quoting huge percentage increases on certain component costs and these massive percentages are memorable for their sheer size.  However, when defrayed across an annualised production cycle for one sku, the actual number is much smaller than the headline. Of course, it pays for any wholesaler or retailer to track raw material price changes – especially at a time of such volatility – to ensure that proposed increases are in line.

Which leads nicely to the final point – shared margin.  Some convenience retailers (and the odd supplier) do seem to forget that any margin built between the cost of the product leaving the manufacturer and the sell price it achieves in store must be shared between the convenience retailer and the wholesaler.  It is worth highlighting that Tesco and Sainsbury’s (and others) have it both ways by operating in both multiple retailing and convenience retailing.  Effectively, they buy all their stock at the best price as a retail multiple but then get to sell at a higher price via their convenience stores, albeit with a higher cost to serve.

Independent retailers do not get the same opportunity.  They must trust that the wholesaler will share as much of the available margin as possible so that they can compete on price and have enough left to invest to maintain store standards. Whilst Booker has a clear advantage in price negotiations, as part of Tesco, the wholesale channel is not doomed, far from it.  Smaller wholesalers can leverage their buying groups so that price increases are reviewed collectively and the channel as a whole can call out any obvious disparity. This was done during Covid to suppliers who did not prioritise the channel and will no doubt happen again if there is any sense of ‘foul play’ on pricing – wholesalers are surprisingly quick to come together when they sense injustice.

Ultimately, I guess this is a plea to the suppliers out there.  Your price models will be prebuilt across all channels and if you treat the wholesale channel fairly then this will mean that the independent retail channel is sustainable because pricing parity has been maintained. Surely nobody expects an independent retailer to be selling at the same price as a Tesco supermarket?!