From Our Print Edition

You’d be hard-pressed to find many consumers happy with the cost of food at supermarkets today, no matter how often retailers say they are pricing to please.

The good news is that consumer packaged goods (CPG) inflation is not the runaway train it was during the pandemic. The bad news is that prices are still deemed too high by many Americans who are reducing the number of items they purchase as a result. This is also a negative for grocers who can no longer rely on steadily rising prices to offset declines in volume.

At Cadent Consulting Group, we recently surveyed the top 10 CPG manufacturers in the U.S. regarding their pricing plans for the remainder of 2024. The vast majority expect normalization or little change in prices compared to last year. That’s not what consumers are hoping to hear.

Even when they spend more than they intended, consumers love the deals they find at Costco.

FOOD SPENDING HITS A 30-PLUS YEAR HIGH

According to reports by The Wall Street Journal and the U.S. Department of Agriculture (USDA), food spending is at a 30-plus-year high, representing 11% of consumer disposable income. This increase has been driven by 25% food-at-home inflation compared to 2020. Higher prices have led to cutbacks in discretionary spending, trade-downs to private label goods, and market share gains by discounters. Units have declined for three consecutive years.

Manufacturers have been forced to increase prices due to supply constraints, cost increases, and a difficult planning environment. Although our survey indicated a return to more “normal” price increases and even some decreases, the one exception was a manufacturer that acknowledged using pricing to cover inflation. This manufacturer is facing very high ingredient cost inflation.

Cadent’s most recent study of marketing and trade spending indicates that 46% of total CPG marketing spending is allocated to trade promotions, or approximately $100 billion annually. Approximately 20% of this is used to subsidize everyday price buy-downs. Talk about confusion! When is the regular price the promoted price? As it turns out, the answer is a lot of the time.

Government mandates can also exert upward pressure on pricing. A current high-profile test is California’s new $20 minimum wage for fast-food workers, up from $15.50. Many expect that paying for the wage increases will mean fewer hours for workers, lower levels of service and higher prices for consumers. Increased automation, already a trend in fast food, will likely pick up.

THE DYNAMIC PRICE IS RIGHT

Fortunately, we still work in a market economy that rewards consumer-benefitting innovation.

Wendy’s recently proposed a solution: dynamic pricing. Dynamic pricing means that prices can move up or down based on various factors. It does not imply surge pricing, often employed by Uber/Lyft, but it could mean personalized pricing depending on the targeted shopper, the time of day, and other demand/supply factors.

Wendy’s initial announcement was a PR disaster, but dynamic pricing is already employed by airlines, hotels, food delivery services, utilities, and many e-commerce retailers.

Chain grocers have long employed zone pricing on a market level, and advancements in technical such as machine learning and artificial intelligence (AI), open up further opportunities. Stores using electronic shelf tags now have the capability to instantaneously adjust pricing to best balance demand and supply.

Will consumers feel shortchanged? Only if there is an information imbalance. The tools that are becoming available allow comparative pricing and the ability to optimize baskets across select retailers. It’s time to take pricing into the 21st century with the tools, technology, and targeting to better serve shoppers and all constituents.

In the end, it comes down to the customer experience.

Do your customers come out of your stores grousing about how little their dollars bought, or do they leave happy?

We’ve begun assessing shopper experiences by measuring smiles per customer exiting a store. The approach may not be statistically sound, but it is telling that we see many more smiles per shopper at Costco than we do at a typical grocery store. Costco members seem to enjoy saving money even though they typically spend far more than they intended when entering a club. So why are they smiling? That comes from the unexpected pleasure of finding good values overall and even hot discounts from time to time. How often have your customers felt this way after shopping at your stores? Doesn’t it track that putting smiles on their faces will help lift your unit sales?

Don Stuart is a managing partner at Cadent Consulting Group, with offices in Wilton, Conn., and Evanston, Ill. He can be reached at don.stuart@ cadentcg.com.