Stability in product cost

January 20, 2023
/ SKUBlog
/ By Susan Sipos

As we enter 2023, each week we will explore one of our 10 trends for the new year. We approach this a bit differently as our trends are developed for suppliers in the food and beverage industry. They are based on what we learn talking to different retailers, suppliers and stakeholders in the industry.

Our third trend is Stability in product cost. Food inflation is a big issue and retailers are eager to work with suppliers who find a way to keep their costs in line and deliver stability. We know there is a lot in the media about food inflation and often retailers are blamed for the increases. It is the store where consumers see the change and where inflation is measured.

Retailers have endured 3 years of drastic swings in sales and service level and for the last year they have been managing unprecedented numbers of cost increases. They know supplier’s cost of doing business has gone up. They are trying to find the ceiling, so that we can bring stability to the market.

Inflation is occurring throughout the value chain

Most of the inflation we see at retail starts much earlier in the value chain. An input cost increase like fertilizer or fuel will impact the cost of goods from primary production. The primary producer will fight to get these increases built into their selling price to the processor. An example we see in the media is dairy where the price of fluid milk from the farm gate is set. Processors like dairies have to pay the higher price. They determine what this increase means to their product cost and then have to factor in any increases they are faced with in packaging, labour and logistics. By the time the retailer sees the request for a price increase from the supplier it can be a substantial change.

Retailers do not like price increases

Yes, retailers will push back and try to negotiate or delay cost increases. They believe increasing retails will slow down sales. Another concern, in some cases more of a problem for the retailer, is price image. If their competitor does not increase their price they are in a difficult position. Increase the retail and be perceived to have higher prices or stay with the competitor and deliver a lower margin.

Price increases also create work. Retail changes require labour to change the price in the system and someone to change the labels and signs at every store. Stability in pricing brings efficiency to retailers, which they like.

People see prices going up and assume retailers are making more money. Sometimes this is true and their costs are changing like everyone else in the value chain. They have trucks that use fuel, they have employees who want to be paid more and many other challenges. They could probably make the claim they need to increase category margins to cover the increased costs they are incurring. This pushes retails higher.

10 considerations for suppliers to bring stability to costing

Every food production or processing business is unique. There is no solution that will work for everyone and perhaps only some of our considerations will work for you. The different tactics you employ to bring stability to your pricing are within your control. The most important point is to work at a stable cost of goods and selling price, your customers will appreciate it and this should improve your relationships.

1. Discuss sales estimates with retailers. We have been in a period of volatility, but we should see less drastic swings and more predictable sales. Once you can agree on a number for sales then you can start to negotiate with your suppliers for inputs, packaging etc. Whether it is true or not, retailers believe they negotiate the hardest on cost increases and find it frustrating when their suppliers just accept an increase from one of their suppliers. If packaging costs increase 15% then do you go out actively looking for an alternative? Or just accept the increase and fight with the retailers to get a higher price for your products. Use your sales estimates to negotiate with your suppliers to bring stability to their pricing for periods of time. Retailers impose periods where they will not entertain a cost increase and leverage their position with suppliers. It would be interesting to see producers and processors adopt the same policies with their suppliers.

2. Put financing in place to pay for increased purchases of inputs or packaging that bring stability to your costs. Not a great time for this with higher interest rates but perhaps the financing costs are absorbed by a better price for more inputs or packaging. Farm Credit Canada are an option for companies throughout the value chain and they do understand food.

3. Logistics costs have been a huge challenge and the cost of moving products must be a higher percentage than it has ever been. The fuel surcharge has been a tactic from this industry to allow them to fluctuate their pricing with the cost of fuel. I am always curious if anyone could ever go back to the beginning of fuel surcharge and prove it has gone up and down with the price of fuel. We do not hear as much about shortages of drivers so perhaps it is time to negotiate some stability into your logistics costs.

4. Many suppliers use channel partners such as brokers, distributors and retail coverage. These costs can increase like all of the others. One thing retailers really get wound up about is costs increasing because other costs are increasing. If your channel partners are looking to increase their costs, push back and get some justification. Similar to point #1 retailers perceive suppliers do not push back enough. Push these suppliers to your business to hold their prices for the next 12 months to enable you to bring stability to your pricing.

5. We do not have a crystal ball but you know your business better than anyone. Try to anticipate where you might have problems or increases in costing. Search for alternatives and be proactive. Nobody could have predicted the invasion of Ukraine and the impact on the food industry. Processors have had to scramble as items like sunflower lecithin have become very hard to attain. If possible, have options and a plan B for the items that will impact your cost of goods.

6. Understand retailer’s windows for category reviews and price increases. If you can, commit to maintain a price until the next window. This will have a positive impact on your relationships. After the past few years retailers are really not wanting to deal with suppliers who want to negotiate outside the predetermined windows.

7. Shhh, don’t share this one with your customers. Measure your trade spend and marketing spend. Retailers will always push you to spend as much or more. They believe if you could invest $10,000 to generate 5,000 cases you should be able to afford it again. Perhaps you have found some tactics more effective and allow you to generate the volume with a lower investment. Reduce the investment and bring stability to your product cost. Just because you did it last year does not mean you have to do it this year. Measure ROI and build the right plan.

8. I am not a huge fan of this but there are times when it is right to change your package size. Look at what is happening in the category and what is happening with consumers. Yes, it is a cost increase when you charge the same for a smaller package, but it is perceived differently. Retailers will focus more on the retail price than the retail per volume.

9. Look for offsets wherever you can. Hopefully there are some things out there that are becoming less expensive. If you can save .10 per unit then you can absorb a .10 increase and keep your price the same. I understand the appeal of keeping the .10 benefit and pushing for the price increase. In this period of inflation, we have to ask where to draw the line. It is tempting when we see other items going up but you have to ask what it is worth long term with your customers.

10. Talk to your customers. They are living in a time when they are blamed for most of the increases. If you can bring stability to your pricing let them know how you did it. As we mentioned earlier they want to hear you negotiated a better packaging cost. Tell them you learned the tactics from them. If you implement a period where you will not entertain increases and leverage your position with your suppliers, they will applaud you for it. Do not always expect a pat on the back but they will notice and your relationship should continue to get better.

If you have any questions about our SKUFood trends, you can always send me an email peter@skufood.com or call me at (902) 489-2900.

Peter

Industry code of conduct update

It looks like we are getting closer to the details for our industry code of conduct. This announcement from the federal minister is likely only coming out if they are confident something will be implemented.

It will be very interesting to see the dispute resolution mechanism. I believe we have robust laws to govern how commerce is done, the challenge is when members of the value chain use their leverage to force others to comply. Stay tuned!

Joint Statement on the development of Canada's first-ever Grocery Code of Conduct

More trends from Grocery Dive

These trends are more U.S focused but we do know what happens south of the border can influence our industry in Canada. They start with food inflation and finish with mergers and acquisitions. It is interesting to see they are predicting more focus on e-commerce and the in-store experience.