With food prices and manufacturing costs on the rise, retailers and manufacturers are under pressure to keep costs down. A recent Acosta report examined the challenges food companies face as a result of these upward costs, as well as some best practices for successfully implementing price increases along the supply chain.
Rising costs in food manufacturing
Nearly half of manufacturers surveyed posted price increases last year at an average rate of 7.8%. Price hikes are expected to continue for 1-2 years due to rising costs for raw materials, packaging, and transportation.
A few examples of price increase drivers:
- Paper pulp: +60% for hardwood and 21% for softwood
- Diesel fuel: +19%
- Gasoline: +12%
- Aluminum: +11%
The report notes that the truck driver shortage leads to higher line haul rates, too — yet another cost burden on manufacturers.
Why not make packages smaller?
Decreasing package size doesn’t appear to be a popular option for manufacturers to help keep costs down. First, half of customers notice package reductions, and it’s not a good look (the internet is riddled with discussions about half-full bags of chips). Acosta’s Kim Adoerre elaborated in an interview. “It’s important for manufacturers to really consider potential adjustments in package sizes…a negative response from shoppers can result in brand erosion and alienation.”
Second, shoppers actually understand cost increases — 80% of customers say they accept that external factors may drive up the price of their food. Third, retailers don’t favor the option, as it creates logistical challenges.
Rising costs in retail
Between rising food prices and learning to adapt to an increasingly competitive marketplace, retailers are hesitant to accept more price increases. In fact, nearly 80% of retailers reported pushing back on price increases from manufacturers.
To mitigate the issue, retailers are making strategic business decisions like hiring economists and securing protection and compensation until the largest competitors move retail price. Retailers are also aligning their private brand costs. “When it comes to rising costs,” Adoerre says, “some retailers compare manufacturer proposed price increases to their own brands and believe they should be comparable.”
However, the report notes that retailers need to accept extra costs in some cases because manufacturers are stuck between a rock and a hard place. “At times, manufacturers are able to absorb, delay, or minimize cost increases, but eventually it becomes necessary to negotiate price increases with retailers,” said John Clevenger, Senior VP/Managing Director, Strategic Advisors at Acosta.
Collaboration is key to navigating price increases
Price increases across the food supply chain don’t have to result in a manufacturer/retailer stalemate. Acosta lines up four best practices for manufacturers to successfully increase prices, and by extension, for retailers to accept rising costs.
Know your facts
When you’re working towards increasing prices, educating yourself is critical.
- Understand price elasticity
- Be able to simulate price increases
- Find the balance of offsetting rising costs and maintaining or increasing profit margins
- Identify a price increase amount that won’t result in market share and sales velocity losses
Transparency is in high demand across the food industry today, and price increases are no exception.
- Allow access to information regarding which price increases are driving costs up
- Provide evidence that price increases are prevalent among competitors
- Offset price increases in the short term
Suddenly springing price increases on retailers or customers is bad business, so it’s prudent to provide plenty of lead time.
- Provide at least 90-100 days in lead time
- Position your increases so that they don’t interfere with marketing campaigns or seasonal product pushes
Retailers and manufacturers are on the same team.
- Reaffirm that you’re making investments to drive traffic to your brand, and by extension, retailers that carry your brand
- Provide post-price increase analytics to reflect sales impact