It's Not 1980: Retailers Are Following the Wrong Playbook
By Kevin Sterneckert
With the pandemic not yet in our rear-view mirrors, the worldwide community is being hit by another unfolding humanitarian disaster in Ukraine, which is further threatening the global economy and supply chain, including the supply of food itself.
In the midst of widespread suffering, gas prices are soaring and food producers fear the impact war will have on food prices and food production. According to The Washington Post, “Russia’s invasion of Ukraine could push U.S. food prices even higher, as the region is one of the world’s largest producers of wheat and some vegetable oils.And the disruptions could drag on for months or even years, as crop production in the area could be halted and take a long time to restart.”
Despite experts’ fears that the conflict will drive higher food costs and potential shortages, many companies are taking advantage of high consumer demand for goods by raising prices even further to both “cover rising costs and to expand their profit margins to pre-pandemic or even record levels,” as reported by Jeanna Smialek for TheNew York Times. The reporting is spot on.
A recent LinkedIn survey of retailers I conducted found that nearly 100% were also passing price increases to consumers. I strongly believe this is exactly what organizations shouldnot be doing, and here is why.
It’s 2022, Not 1980
Many retailers, brands, and other consumer-facing companies are using a 40-year-old playbook on how to counter inflation. As they did in the late 1970s and early 1980s, they are passing along supplier price increases by raising their own prices — without regard to consumer behaviors and demand — with a long-standing belief that consumers will just accept these changes without question.
While today’s inflation rate is similar to1980, it was falling from a much steeper height back then, and it’s rising today. The Fed’s monetary policy ushered in a deep recession in the 1980s, and unemployment was climbing to new post-WWII heights. Today, unemployment is dropping, money supply has expanded, and the economy is strong.
2022 couldn’t be more different than 1980. Forty years ago, regional stores only had to compete against each other. They didn’t worry about the smaller stores around the block or the big national chains. The internet hadn’t yet been invented and Jeff Bezos was a high school student dreaming of building space hotels and moon colonies.
Today, nearly every retailer competes with Amazon. Thirty percent of brick-and-mortar is now competitive with e-commerce retailers. And Amazon’s ability to compete on price, delivery, convenience, and customer satisfaction is fierce. Think about this: Amazon changes millions of prices each day, watching inventory, consumer behavior, and competitors, to maximize sales. Walmart and Target also have the AI-powered capabilities to do the same.
Chances are if you are like most retailers, you lack the capability to turn on a dime like Amazon. In fact, 76% of retailer respondents to Retail Systems Research survey on “Price and Promo after the Age of COVID-19,” conducted in February 2022, rated predictive analytics as the “highest value” for pricing and promotion capabilities.
The Perfect Storm
Throughout my career in the retail industry, there has never been a period when so many forces — inflation, supply chain disturbances, product shortages, labor shortage, and a pandemic — have attacked retailers simultaneously.
While consumers are still spending, they are increasingly becoming more price conscious. In fact, nine out of ten of them are complaining about inflation, rising prices, and their perception of the state of the economy.
The old playbook won’t work in this environment. Raising prices indiscriminately is a sure path to put your business in the cross hairs of your consumers and Amazon. To compete in today’s marketplace, retailers must understand their customers the way Amazon, Walmart, and Target do, but only a fraction of companies have this capability. The Retail Systems Research survey also found that respondents rated pricing optimization (97%) and consumer behavior analytics and insights (94%) as “highly valuable” in achieving strategic pricing and promotion initiatives, but just about half were satisfied with their current capabilities.
The New Retail Playbook
To compete in 2022, retailers need to infuse consumer behavior insights into every decision that is customer facing, including:
Consumer preferences have changed dramatically over the past few years, have your category roles and goals adjusted as well? The 2022 playbook includes deep analysis of customer behaviors to adjust objectives and merchandising decisions. This is the right time to review and revise your strategies.
While there will continue to be inventory shortages, this is the perfect time to evaluate assortments based on consumer behaviors. Identify where private label can expand and where regional or even hyper-local suppliers can emerge as differentiators for you with your customers. Based on my “rule of 17,” there is an average of 17% duplication in every category. Eliminate the duplication to bring in local/regional products and flavors that might even be easier to source.
Inflation shows no signs of fading. This is an opportunity for retailers to increase their competitive positions by avoiding the practice of simply adjusting the retails to match cost changes. Retailers can identify the items with high price sensitivity and avoid matching the cost changes through commensurate retail price changes. The alternative is to minimize the increases on highly price sensitive items and spread the remaining costs across other items with lower price sensitivity.
Mass promotions are becoming less effective and with a transition to higher rates of e-commerce, fewer customers will see the end caps, side stacks, and floor displays that promote and influence demand. The 2022 playbook encourages personalization that engages the consumer with merchandise they are interested in purchasing at promoted prices.
As consumer demand is changing rapidly, there will be misses on inventory by store. AI-powered markdowns and clearance solutions can provide recommendations that are store/SKU specific that drive increased sell-through while minimizing the price reductions.
The retail industry is experiencing mounting pressures that are driving the pace of change. Consumers will reward retailers who are able to rapidly identify and adapt to the changes of consumer demand. Retailers who invest in the capabilities to sense and shape demand through improved category strategies, refined assortments, improved prices, and promotions as well as leveraging intelligent markdowns will win the battle for share of wallet.
— By Kevin Sterneckert, Chief Strategy Officer, DemandTec
About the Author
Sterneckert has more than 35 years of industry experience in retail technology, including extensive hands-on pricing and merchandising experience. Sterneckert is a recognized expert in helping industry leaders and software companies understand the possibilities of artificial intelligence, Internet of Things, big data, and technologies of the future that are creating excellence in the supply chain. He also served as research VP and lead analyst for the consumer value chain for Gartner Research.
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