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Increasing Costs – Affecting Current & Future Retail Business

by Mike Brown VP, Business Development

June 8, 2021

 

With the ongoing supply chain constraints, could there exist a direct relationship between cost and retail selling prices? Should there be one? With so many volatile factors affecting costs recently, a more strategic approach to raising retail prices may be worth considering.

Highlights from recent Pricing Index Reports

  • For the period April 2020 – April 2021, Canada’s Consumer Price Index rose 3.4% and the US comparable index rose 4.2% for that same period, the largest impacts coming from gas, automotive, homes, and utilities. All having a negative effect on the consumer’s wallet. Retailers need to be aware of that effect, knowing that costs for consumer products are also starting to ramp up.
  • In March and April of this year, large US-based companies including Clorox, Coca-Cola, Whirlpool, Proctor and Gamble, General Mills, Unilever, and Nestle announced that they would be increasing prices on some products.  Reasons cited include labour expense, commodity pricing, and transportation costs. Other cost impacts in North America could include inventory holding costs and increased tariffs.

Cost Increases

  • When considering commodity cost increases vs cost increase of final production goods, determine what % of the final product can be attributed to the affected commodity or components. Vendors can help with this understanding and that can be an important element in determining the retail pricing strategy.
  • Vendor cost increase proposals should provide details for transparency and accountability. They should also be submitted well in advance so that the total line structure can be reviewed vs ad-hoc changes. It has become more important than ever that retailers require vendors to provide a detailed breakdown for each SKU when proposing cost increases. The detail should include the components that make up the cost, showing what has changed and why. For example, if domestic plastic as a commodity has a cost increase of 25% and the final product is made up of 50% plastic, it is reasonable to see a vendor SKU breakdown showing a total cost increase of 12.5%.

Retail Selling Price Increases

Before passing 100% of the cost increases on to the customer via retail selling price increases, there are various approaches that can be considered:

  • If the cost increase is short-term or temporary the cost may be able to be absorbed with no change to the selling price. Cost changes can also be blended with owned inventory that was purchased previously.
  • Be aware of the price elasticity for the product type. Remember, non-essential goods have a high elasticity of demand, and generally essential goods or consumer staples have a low elasticity of demand. If cost increases are occurring in high elasticity SKUs, maybe some of that impact be buffered by increasing retail prices in SKUs that are low elasticity.
  • If the SKU is considered a KVI (Key-Value Item) with high price point awareness, increase the cadence of competitive price checks.
  • Manage the SKU profit %  through marketing programs, adjusting promotional discount % and/or frequency to ensure that the average “out the door” price is buffered.
  • When establishing new retail prices consider offsetting other cost impacts such as increased spending on eCommerce fulfillment.
  • Finally, complete the pricing strategy, roll it up and review the overall financial impact for the short and long term.

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