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Getting Ahead of the Commodity Curve
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Getting Ahead of the Commodity Curve

Updated 10/20/11: This post has been revised to provide updated data relative to sales figures.

Retailers and manufacturers are caught between shrinking margins due to rising commodity costs and price sensitive consumers. In this scenario, retailers and manufacturers need to collaborate and find creative ways to spend promotional dollars that result in true market expansion and category growth.

“Establishing a disciplined approach to pricing and promotions is key to maximizing returns during a dynamic business cycle,” commented Dennis Moore, SVP Analytics, Nielsen at Consumer 360 in Florida. “This can be enabled by manufacturers and retailers collaborating to think of creative ways to drive true growth and market expansion. This consciousness itself can reduce economic waste.”

While the worst of the recession has past, retailers and manufacturers are still operating in a challenging environment. Consumers in the U.S. remain frugal when it comes to price, and the retail landscape offering is as competitive as ever. The fact that commodity prices have spiked and are returning to record highs only increases pressure on retailers and manufacturers. Increasing commodity prices coupled with cautious consumers squeeze profits and impede growth.

In tough economic times, consumers gravitate towards value: they decrease discretionary spending, dine out less and buy more on promotion/sale. Consumer packaged goods (CPG) companies and retailers cannot afford lost sales. Smart and efficient planning on pricing and promotion is one of the best ways to achieve market expansion and growth—despite the commodity squeeze.

Pricing and Promotion Strategies and True Market Expansion

In 2010, 63 percent ($243 billion) of U.S. retail dollar sales were spent on non-promoted products at regular prices.

promoted-price

Promotions and sales on certain products lead consumers to merely switch stores and purchase their preferred product in a different retail outlet more than usual. While this benefits the winning retailer, it does not actually benefit the manufacturer—who would have profited from the sale in any location. On the other hand, promotions on other types of products cause consumers to “brand-switch,” or purchase a brand in a store that they usually don’t buy. This is a true win for the winning brand, but it does little for the retailer who would have made the sale no matter which brand it was.

While these types of promotional sales have their respective benefits, they don’t represent true market expansion because they are not actually satisfying new consumer demand or increasing total consumption.

volume-benefit

In the demand framework, promotions that lead to actual market expansion for both retailers and manufacturers are the true winners. Nielsen’s research shows that promotions on products such as coffee, laundry detergent and paper towels – non-impulse-buy items that consumers (plural) can use more sparingly as budgets become stretched – are the most likely products to lead to this true market expansion.