Getting Ahead of the Commodity Curve

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 ($240 billion) of U.S. retail dollar sales were spent on non-promoted products at regular prices. For brands and retailers, the pricing strategy is relatively straightforward. If a brand is the only one in a category to increase prices, it is likely to lose out on enough sales to make the price change inadvisable. But, if price increases are made across competitors or the entire product category, sales declines will be smaller, giving brands and retailers more profit.

Promoted prices controlled 37 percent ($141 billion) of 2010 retail dollars. About $76 billion of that was sold via subsidized volume—products on sale that consumers would have purchased naturally. The other $65 billion was sold on incremental volume—products consumers would not have purchased in that particular store at that particular time. While this incremental volume is traditionally seen as a “win-win” success, when you examine who actually benefits, it is clear that there is more than one type of incremental volume gain.

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.

n 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 snack foods and other indulgent items are the most likely products to lead to this true market expansion.

As retailers and manufacturers plan promotions, first determine what type of incremental volume these promotions are likely to create—and share costs accordingly. Promotions that lead to true market expansion will be the ones that actually make winners all around.

For more information at http://www.nielsen.com