Insights

Lower Prices a Boon to Consumers, but a Bane to Retailers
Article

Lower Prices a Boon to Consumers, but a Bane to Retailers

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Todd Hale, Senior Vice President, Consumer & Shopper Insights

In 2007 and for much of 2008, rising gasoline and commodity prices led to a wave of price increases in the consumer-packed goods industry. For some categories, it was not uncommon to have two to three price increases as ingredient, packaging, energy and transportation prices jumped sharply. During that time, many retailers—particularly those selling food and beverages—experienced a lift in sales and profits. As recessionary pressures intensified at the end of 2008, gasoline and commodity prices started to drop and many retailers began passing on the savings to their shoppers and cutting prices broadly to be more competitive with value retailers.

Lower prices on groceries, gas and other household items have offered some degree of relief to stretched American consumers. With uncertainty about the economy persisting, shoppers continue to watch their money and seek out value. But to retailers, lower prices present challenges: how to grow market share without taking a hit on the bottom line; and, after being very vocal about the savings they are providing their shoppers, how do retailers elevate prices without disenfranchising shoppers?

Nielsen’s recent review of retail prices found that over the 4-week period ending June 12, 2010, prices were off or flat versus year ago providing exceptional value to consumers, but weakening trends for retailers. Unit prices have been dropping sharply since March 2009, and the number of items on promotion—in the form of feature ads or displays—has gone up. When one store slashes prices to gain competitive advantage, others follow suit. Meanwhile, brands have resorted to more promotions to stimulate sales and stem the growth of private labels.

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Unfortunately for retailers, these price cuts and heightened promotions have not achieved the desired effects as both dollar and unit sales are off in each of the last three (four-week) periods. But the big unanswered question is: would the situation be worse without these value efforts?

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Which Departments Are Faring the Best?

For consumers, the good news is that prices across all departments are better now than what was experienced for much of 2008 and into early 2009. Some departments showed price increases in recent quarters, such as dairy, fresh meat and fresh produce, but prices are still very attractive for consumers seeking savings. Within dairy and fresh produce, it is interesting to note that increased prices are yielding stronger retail sales trends.

The deli department has held up quite well, while alcoholic beverages is the shining star of departments, posting sales increases in both dollar and unit terms.

The departments with the most negative sales trends were fresh meat, non-food, and general merchandise, with dollar and unit losses the greatest among the non-food and general merchandise departments. Dry grocery department sales trends were similar to the total store trend. The frozen department was on a stronger sales trend, but unit and dollar sales have fallen in recent periods.

In a further sign that price cuts were not having a positive impact, only one of the top 16 categories with the largest price cuts actually saw dollar sales rise. So drastic price cuts don’t appear to provide incentives to alter the frequency of consumption!

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Unemployment Continues to Stall Recovery

Perhaps the biggest factor preventing retailers and CPG companies from raising prices is the state of the U.S. economy. While the Great Recession may be officially over, the recovery has really only started in earnest—and in unique ways, namely, without the growth of jobs. After four straight months of job creation, the momentum was stopped dead with a surprise June announcement that the economy had once again shed jobs—this time 125,000. The unemployment rate dropped to 9.5%, but including people who are not working full-time but would like to be, that number goes up to 16.5%. Moreover, almost half (46%) of unemployed individuals have been without a job for more than 27 weeks. And, unemployment is particularly high among ethnic, younger, less educated and male populations.

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These statistics are obviously sobering, and they limit the ability of CPG manufacturers and retailers to raise prices without losing customers to value brands and channels.

What’s the Answer?

As prices have fallen, so have same-store sales trends for retailers, particularly those focused on grocery. Retail price wars are having a negative impact.

So how do retailers get through this period? In the short-term, look for opportunities to raise prices on selected items when justified; merchandise assortment that you have a competitive advantage; look for opportunities to up sell shoppers to build baskets; offer your biggest spenders the special kind of attention they deserve.

Until consumers feel more confident about the state of the economy, their personal finances and job prospects, they are going to seek bargains and keep their spending in check. While there have been some signs of optimism, it seems as if something arises that cancels out any progress made. One thing is for certain, however: until there’s a period of consistently positive economic news in the U.S., consumers will be skittish, and retailers and CPG manufacturers need to be prepared to continue weathering the storm and finding innovative ways to grow share without sacrificing dollars.