Mitigating the Impact of Rising Inflation on Grocery Retailers
With the disruption caused by macro events, commodity shortages, and escalating prices, a closer look at your supply chain reveals three key solutions.
The generational inflationary challenge
Everywhere you look, it seems like prices are rising more and more each day, from the petrol pump to the cost of your pint. The current inflation rate is the highest it’s been in more than 40 years. However, nowhere is this more keenly felt than with the everyday goods we put in our grocery basket.
According to the Office for National Statistics (ONS), UK inflation — or the rate at which prices rise — increased to 9.1% in the 12 months leading up to May. This is the result of the generational trifecta of challenges stemming from the aftermath of Brexit, Covid-19, and the current conflict in Ukraine. These global macro events will inevitably impact the bottom line of businesses, which are already experiencing global materials shortages, supply disruptions, and severe cost-price instability.
The inflationary impact on food and grocery items
Consumer research firm Kantar predicted that the average annual UK grocery bill will rise by £380 this year, meaning consumers will be paying an extra £30 a month for food and other groceries. Kantar’s research also highlighted how grocery prices increased by 8.5% over the past four weeks, as grocery inflation hit its highest rate in 13 years.
Grant Fitzner, ONS economist, said that the widespread rise in food prices meant the cost of goods (COGs) leaving factories rose at their fastest rate in 45 years in May, with the cost of raw materials at the highest on record, impacting the profitability of global supply chains.
The inflationary impact on consumer behavior and demand
These cost-price pressures will naturally be passed down the supply chain to the end consumers who have already started to react to the changing macro environment. As shown below, we can see how UK retail value has held firm while sales volume declines.
This highlights that while customers are putting fewer products in their baskets, the price of those products has increased. In summary, inflation is “hiding” the actual decline of volume demand from consumers — a decline that isn’t sustainable for businesses in the long run.
As well as buying less, we see other changes in consumer behaviour as they switch from branded goods (sales of which are down by 1%) to supermarket own-label products. Sales of these lines, which are often cheaper, have risen by 3%.
This is driven by Aldi and Lidl, both of which have extensive own-label offerings that they’re known for. Consumers are also trading down to perceived value ranges, such as Asda Smart Price and Sainsbury’s Imperfectly Tasty, to save more money, contributing to the 12% market value growth of own-label lines.
Three ways retail organisations can deal with inflationary price increases
Now that we’ve established the complicated macro environment that both consumers and organisations are currently navigating, what’s the solution? Below are a few key strategies retail organisations should be exploring to offset the rapidly increasing costs and complexities of the current supply chain.
1. Review and optimize supply base relationships
In these current inflationary times, retail businesses have no doubt submitted — or been on the receiving end — of these cost-price increases. Pressures in the supply chain mean that organisations need to focus on maximising their current and future commercial contracts. With so many price rises from the supply base, supply chain procurement teams will need to evaluate if suppliers are passing on an increase that’s truly in line with their increasing costs.
Businesses should holistically understand the components, commodity, and input costs of their products before engaging in cost-price negotiations with suppliers. This will ensure an appropriate starting base for existing or new commercial contract discussions. Maintaining a focused strategy that’s supported by a capable, skilled team will help optimise this process.
Companies should also revaluate their supply bases to figure out which role each supplier has or can play within their mix. Some suppliers will inherently be more collaborative and transparent. The goal is to pinpoint strategic supplier partnerships and manage the overall mix while moving away from costly, inefficient suppliers. Rather than viewing this as a zero-sum equation, companies should adopt a collaborative, ‘win-win’ approach that ultimately maximizes potential benefits for all parties. Open book cost modelling is an example of this transparent, collaborative approach.
2. Manage product pricing and promotional mix
A holistic review of your product portfolio will also be key. Businesses need to look at their ranges in their entirety and see which SKUs will need to be prioritised to ensure availability and price stability. This same focus will also be needed on the tail end of the range, and organizations will need to analyse and conclude which SKUs in their range are impacting the total portfolios effectiveness and profitability. SKUs that aren’t ‘pulling their weight’ unfortunately will have to be delisted or de-prioritised.
Organisations will need to be willing to invest in price, so that they don’t fully pass on the inflationary market pressures onto their consumers. This is a fine balancing act of managing profitability, consumer demand, and market share. Retailers that don’t manage this well end up passing too much of their cost burden to the end consumer, negatively impacting how much consumers are willing to buy from them and ultimately eroding their market share. The gains made by Aldi and Lidl versus the likes of Tesco and Morrison’s over the past decade are clear examples of this.
Promotional management also plays a key role in mitigating the pressures of inflation. Retailers can review and revise existing commercial contracts with their suppliers to change up their promotional mechanics to best handle the current macro environment. This includes revising the depth of a promotional price cut, changing promotional mechanics to ‘TUFA’ or ‘Buy X get X’ multibuy offers, or even amending the trade plan so that the promotions take place fewer or more times in the trading year.
3. Develop End-to-End (E2E) supply chain visibility via control towers
Supply chain functions are no longer a back-office afterthought in today’s modern grocery retailers. Especially in the current macro environment, winning organisations are the ones committed to investing and focusing on maximizing the effectiveness and capabilities of their supply chains.
A key part of enabling this will be organisations that strive to be well connected and have end-to-end visibility across their supply chains. Implementing control towers can help drive cross-functional collaboration by removing traditional data silos, reducing unnecessary processes, and leveraging new technology and data to drive real-time actionable insights.
Striving for more visibility and transparency of data flows within the supply chain allows for more reactive demand and supply forecasting — key components to successfully navigate these uncertain times. Companies that commit to leveraging these new technologies — as well as implementing robust forecasting and Sales and Operations Planning (S&OP) processes in their teams — will drive more informed decision making and optimize handling of unforeseen events, ultimately maximizing their resilience and profitability.
At the end of the day, we can’t hide away from the supply chain disruption and soaring inflation that we’re seeing around the world. The impact on companies balance sheets and consumers behavior is being seen now, and developing quickly. However, retailers can leverage their supply chains to combat this. Organisations that effectively manage their supply base, product portfolio and supply chain systems and processes will be the ones that successfully navigate these uncertain times.
At Slalom, we’re helping people and organizations mitigate the impact of rising inflation by focusing on supply chain optimization and leveraging technology to drive results. Download the full whitepaper here.
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