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 As almost always happens with such policies, they failed, and were withdrawn in 1973.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.