Monday, February 09, 2009

A bit of speculation on food pricing

A week or so ago, I posted an item about the increasing tension between supermarket chains and their CPG/food & beverage suppliers who raised prices in 2008, but have not lowered them since. As usual in such cases, there are two sides to the story.

I also quoted from a news item that commented on a sidelight of the story:
But analysts say they're already seeing an increase in so-called promotional dollars, or money that vendors give to retailers to subsidize temporary discounts like two-for-one offers.
I have ever since been musing on that sidelight, and wondering whether it might in fact be a key component of the story. This is, I hasten to say, pure speculation, and I have no way of knowing whether it has any foundation in fact.

Let's start the speculation with a bit of history. The great increases in CPG/food trade promo spending -- when spending as a percent of sales doubled and tripled to near today's range of about 15%-20% -- occurred in the 1970s. They resulted, those who were involved tell us, out of the massive inflation of that decade and out of the government policies that attempted to deal with the inflation.

In 1971, the government instituted wage and price controls to fight inflation. As almost always happens with such policies, they failed, and were withdrawn in 1973. Inflation continued throughout the 70s and into the early 80s. Many manufacturers raised their prices more than necessary after the controls were lifted and kept them high throughout the decade, offsetting the excess increase with allowances to their retailers. They looked at this as insurance against reimposition of controls -- they had higher prices on the books to protect themselves from government auditors -- and meanwhile the allowances effectively cut their prices down to reality.

So much for the history, here comes the speculation: I'm wondering if part of the suppliers' reluctance to cut their prices now has a similar foundation. In the face of economic uncertainty, and with the likelihood of huge government deficits that could trigger inflation, are suppliers hedging their position by keeping relatively high prices on their books, while effectively decreasing the real price through allowances? If so, history tells us that once the new levels of trade spend are established, it may be tough to lower them.

As noted, this is just speculation, but I'd be curious to hear from anybody who has information to support or debunk it.


Jamie Tenser said...
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Jamie Tenser said...

I believe you're onto something with this analysis, Bob. But the trigger here is not Nixonian Wage & Price controls but Bushian petroleum price volatility.

Manufacturers appear to be keeping list prices high enough to allow for fluctuations in commodities, and dealing back as necessary to remain competitive. Later, if oil (or sugar, or corn) prices spike, they can claim they've held the line on prices.

Now this is me reading between the lines, as you have. I wonder if some of our friends in the CPG world can help us confirm this intuition.

Mark Ahrens said...

I like the way you have connected the dots drawing a potential historical correlation between wage and price controls in the 70s and today’s commodity-driven price increases. To try to predict how suppliers will react to today’s situation, it may be informative to think about how different companies utilize trade funds.

The suppliers that utilize trade as a strategic asset to allow them to modify effective list prices and price gaps, may very well flourish from today’s environment. On the other hand, suppliers that treat trade spending as a necessary cost of doing business without tying trade funding into an overall corporate strategy may not look at today’s situation as an opportunity at all.

Mark Ahrens said...

The tension between trading partners over pricing has erupted in Western EU

Tensions between retailers and suppliers have intensified, with Unilever facing the removal of 300 of its products from the shelves of one of Belgium’s largest supermarket chains after the two parties failed to conclude price and product negotiations for 2009.

Delhaize Belgium is suspending purchases from the Anglo-Dutch group, including those of supermarket staples such as Knorr, Dove soap and Axe deodorants, after refusing to meet Unilever’s demands on price increases and product promotion.

See full article

Bob Houk said...

Thanks, Jamie -- I think you may be right that oil price volatility would have as much to do with it as inflation (interestingly, we had the first great oil spike in the 70s as well).

Bob Houk said...

Mark: You're absolutely right that trade spending needs to be part of the overall marketing strategy -- and the need to integrate it increases as the spend increases.

Also, thanks for the Unilever link -- I'll do a post on that one.