Will 2011 Be a Year of Supplier-Retailer Pricing Conflicts?

If, as some economists argue, large government deficits will result in inflation, then suppliers will have no choice but to increase prices. If consumers, having become used to heavy discounting, resist the increases, then fights between suppliers and retailers will become commonplace.

Here we see reports of ConAgra and General Mills seeking price increases. General Mills is seeking to cut $1b from its costs to offset commodity price increases, but will nonetheless have to pass some increases on:

The company posted earnings and sales on Thursday that missed Wall street estimates, hurt by higher commodity costs and spending on promotions.

The story was similar at ConAgra:

ConAgra Foods Inc is looking to price increases to help boost results in coming months after reporting quarterly profit that fell due to rising commodity costs and weak response to promotions.

And the issue is not limited to the US, of course. In China, the leading supplier of noodles, Ting Hsin, stopped shipping to Carrefour after Carrefour rejected a price increase of 0.2 yuan (about three cents) per unit.

Ting Hsin International told the Hong Kong Stock Exchange in October that it was raising the retail price of each package of instant noodles from 2 yuan (30 cents) to 2.2 yuan due to an increase in raw material prices.

Two months after the announcement, the Taiwan-based food and beverage maker halted shipments of instant noodles to Carrefour stores in the mainland. A company official told First Financial Daily that the reason for the halt is that Carrefour wants to cut 0.1 yuan from the suggested 0.2 yuan price hike.

Whether these attempts to raise prices succeed will depend in large part, of course, on the strength of the supplier. ConAgra and General Mills have some very strong brands, and Ting Hsin’s Master Kong brand has over 40% of the noodle market. Other suppliers recognize that they may not be able to do the same:

"Only large suppliers such as Ting Hsin can negotiate with the retailers. For small suppliers like us, it is always take it or leave it," said Yang Lei, general manager of a food and beverage distributor in Beijing. […]

"We have little bargaining power over the purchasing price of the big retail chains. Because they have extensive sales channels with high sales volume, suppliers can't afford to lose this business relationship," said Yang, whose company supplies to Carrefour and Wal-Mart.

Also in China, Kraft recently stopped shipping Oreos to local chain Lianhua in a pricing dispute.

Exit Question: Are you expecting to see an increase in supplier-retailer pricing fights this year?

At Last! Competition for TicketMaster

A bit of a personal rant: Of all the companies that I patronize regularly, TicketMaster is certainly the one I most despise and most want to see brought down.

Unfortunately, there is often no alternative to paying TM's absurdly inflated 'convenience fees' when buying tickets for many types of events -- if you want to buy a ticket to see 'Wicked' here in Chicago this week, a $92.50 ticket will cost you $106.71, an upcharge of more than 15%.

They are an unregulated monopoly, but it looks like perhaps they are about to get some competition.

ScoreBig Inc., which has raised $8.5 million from investors including private-equity firm Bain Capital and media executive Shari Redstone, has been quietly testing a system that aspires to do for concert and sports tickets what Priceline.com does for airline seats and hotel rooms: Allow customers to buy them at cut-rate prices, while avoiding the whiff of desperation that typically accompanies discounts.

Unsold seats are a major problem for the music and sports industries alike. "We have 35% to 50% of total industry capacity that goes unsold each year," said ScoreBig Chief Executive Adam Kanner, "and fans that can't afford" the events. 

Granted, it's only the left-over seats, but it's a step in the right direction. Anything that puts pressure on pricing, even in one area, should (I hope) have the effect of bringing down prices overall.

Mail-In Rebates Continue Decline

According to this article in USAToday, mail-in rebates on Black Friday promotions have declined dramatically the past few years:

The number of Black Friday promotions from major retailers with mail-in rebates has dropped from about a third a few years ago to just 10% so far this year, says Brad Wilson, founder of BradsDeals.com.

I'm not sure what the statistical basis is for his numbers, but I think it's unquestionable that many suppliers and retailers are avoiding mail-in rebates. The decline began several years ago when the public clamor about practices that were often deceitful and sometimes flat-out fraudulent reached a point where the Federal Trade Commission began investigating. Fines and public shaming followed, and some retailers (Best Buy most prominent among them) began eliminating the practice.

I see a lot of ads indicating 'instant rebates' -- prices reduced at the cash register. Is there any research indicating that this is more effective than a TPR? -- which is what it is.

UK supermarkets cheaper than discounters

There's been an interesting development in the UK supermarket arena -- the major grocery chains are now priced at or below the level of discounters -- at least in Edinburgh. In test-shopping a range of products at the "big 4" chains and the Lidl and Aldi discount stores, a Scottish newspaper found:

Asda was the cheapest for the overall shop, at £42.90, narrowly beating Lidl by just 17p – the cost of a tube of value brand toothpaste. Only Sainsbury's (£48.16) was more expensive than Aldi, at £46.39.

The interesting turnabout was:

The no-frills stores have – perhaps turning popular preconceptions on their head – defended their prices, saying it is about value for money and shoppers have to take quality into account.

Maryland outlaws RPM

A bill passed by the Maryland legislature is intended to nullify the effects of the Supreme Court's Leegin decision in that state.

Under the new state law, retailers doing business in Maryland -- as well as state officials -- can sue manufacturers that impose minimum-pricing agreements. The law also covers transactions in which consumers in Maryland buy goods on the Internet, even when the retailer is based out of state. That could potentially affect manufacturers throughout the country.

The article says that several other states are considering such legislation, but I doubt there will be any need. Senator Herb Kohl's subcommittee begins hearings next month on a bill to overturn Leegin at the federal level, and that will preempt any state actions.

Kroger not pushing back on pricing

At least, not hard. But they warn their suppliers to watch out for the consumers pushing back.

"While we'll push back a little, what a vendor decides to do with pricing is their decision, but they also own the volume result," Kroger Chief Executive David Dillon said at a Barclays Capital conference.

Possibly big price discrimination decision

Time will tell how big this is, but a food distributor in Pennsylvania won a Robinson-Patman suit against a supplier for discriminatory pricing and against Sodexho for inducing discriminatory pricing.

Feesers filed its complaint against Michael Foods and Sodexho on March 17, 2004, alleging price discrimination in violation of the Robinson-Patman Act. A three-week bench trial took place in early 2008 before Judge Sylvia Rambo in the federal district court in Harrisburg, which resulted in the April 27, 2009 decision.

At trial, Michael Foods and Sodexho argued that Feesers and Sodexho were not in "actual competition" for purposes of the Robinson-Patman Act because Sodexho provides food management services to its customers, whereas Feesers is a food distributor. The court found, however, that both Feesers and Sodexho procure and distribute food for the same institutional customers and, thus, are in actual competition for the same food dollar.

Although the injunctions issued by the district court are binding only as to Michael Foods and Sodexho, it is now clear that price discrimination by food suppliers against distributors such as Feesers and in favor of large-volume food management companies and GPOs such as Sodexho will not be tolerated by the courts.

This law blog quotes attorneys for the two sides, who disagree (no surprise) as to the importance of the decision:

Kessler [Feeser's attorney] told us Wednesday that the decision could have a major impact on the food distribution industry. In recent years, he explained, food management companies like Sodexo--which provide procurement and management services for cafeterias at schools, hospitals, and prisons--have used their large client base as leverage to extract better pricing deals from suppliers. That's hurt distributors like Feesers. "Sodexho [said to its clients], 'We don't compete with distributors so you can give huge discounts,' " Kessler told us.

Peggy Zwisler of Latham & Watkins, who represented Michael Foods at trial, disputed Kessler's view of Judge Rambo's opinon. She told us it's "very fact specific" and does not have broad implications. She also said that Michael Foods has "strong grounds for appeal" and it intends to do so.

The decision is here.

I am not an attorney, so take my opinions with several grains of salt, but it seems to me that the most significant point in the decision is that no proof of competitive harm is required, that harm can be assumed from the size of the price differential. My understanding is that this interpretation, if upheld, would make such suits easier to win in the future.

“Competitive injury” is established prima facie by proof of “a substantial price discrimination between competing purchasers over time.” In order to establish a prima facie violation of section 2(a), Feesers does not need to prove that Michael Foods’ price discrimination actually harmed competition, i.e., that the discriminatory pricing caused Feesers to lose customers to Sodexho. Rather, Feesers need only prove that (a) it competed with Sodexho to sell food and (b) there was price discrimination over time by Michael Foods. This evidence gives rise to a rebuttable inference of “competitive injury” under § 2(a). The inference, if it is found to exist, would then have to be rebutted by defendants’ proof that the price differential was not the reason that Feesers lost sales or profits.

How many ounces in a pint?

Not to get off-topic, but one reason I'd like to see the US switch to metrics is that I can never remember how many of this there are in that. But Ben & Jerry's is out to remind us that there are sixteen ounces in a pint.

This is not an instance of corporate high-mindedness -- taking on a civic responsibility of educating the masses. The reason for B&J undertaking this campaign is that their principal rival, Haagen-Dazs, has begun marketing fourteen ounce "pints" of ice cream.

"One of our competitors (think funny-sounding European name) recently announced they will be downsizing their pints from 16 to 14 ounces to cover increased ingredient and manufacturing costs and help improve their bottom line," the statement said. "We understand that in today's hard economic times businesses are feeling the pinch. We also understand that many of you are also feeling the same, and think now more than ever you deserve your full pint of ice cream."

I can see Ben & Jerry's having some fun with this, but I guess Haagen-Dazs has found itself caught between rising commodity costs and retailers who won't accept price increases. Cutting down sizes has been a traditional method of avoiding price increases, but it's one thing to shrink a candy bar or fill a cereal box a bit less full, and quite another to redefine accepted units of measure.

Saks will stop deep price cuts

Saks, which took a lot of heat from fashion designers and other retailers for their deep discounting in Q4, said they won't continue the practice, but they are expecting to reduce prices overall, with the help of their suppliers:

Saks said it was expecting its vendors to provide products at price points more in line with the current climate.

The Q4 price cuts, as much as 70%, caused Saks' margins to drop from 37% to 20%, at the same time sales were dropping 15%, Lower margins on lower sales is a nasty combo.

P&G expects to hold the line on price hikes

This looks likely to be one of a long series of posts on the Great CPG Price War of 2009. First there was this, in which I speculated that perhaps the price hikes are a hedge against uncertain economic conditions (following the model of the '70s). Then we discussed the Delhaize-Unilever spat.

Now we have P&G's CEO A.G. Laffey saying that the price increases his company put through last year will stick.

"Our products don't deliver value [just] because the prices on the shelves are lower," A.G. Lafley, chief executive of Procter & Gamble Co., told analysts and investors at a conference here.

Like several other industry executives who spoke at the event, Mr. Lafley said his company doesn't plan to roll back the significant price increases it has made over the past several months.

There also is a report in the article that Safeway suspended shipments from P&G in late December, but that appears to have been an inventory decision, rather than part of the pricing fight.

Executives from Clorox, Nestle, and Kimberley-Clark are also quoted as saying they will hold on to their price hikes.

More on the food-price battle

In the comments to my previous post on pricing tensions between suppliers and food retailers, Mark Ahrens pointed us to the Unilever-Delhaize dispute in Europe, where Delhaize tossed hundreds of Unilever products out of their stores.

Unilever spokeswoman Aurelie Gerth said Delhaize, which had already removed 70 other Unilever goods before October, refused to buy all the brands the company offered and wouldn’t guarantee new products would get shelf space. Though talks continue, there’ll “probably not be a solution this week,” she said.

“We didn’t agree to their terms, so they refused to grant us discounts,” said Delhaize spokeswoman Liesbeth Rogiers. “That would really boost our purchasing prices and we can’t and won’t pass those on to our customers.”

Throwing out one of the world's leading CPG companies seems like a pretty bold step, and one suspects Unilever won't be out for long. But I was struck by this step that Delhaize has taken:

Delhaize plans to sell the remaining Unilever products it has in stock, and has put up signs in its stores directing shoppers to alternative brands and private labels, Rogiers said.

In regard to food prices in general, a bit of perspective might be in order. This item from WomensDay has, among other things, comparative prices (adjusted for inflation) for food products -- in the 1950s, a dozen eggs cost the equivalent of $5.29, and in the '70s a pound of round steak was $9.33. The next time I gripe about prices, I'll try to keep those in mind.

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.

Grocers complain that prices aren't dropping

Business Week reports that grocers are warning they will fight food manufacturers who raised prices last year in the face of commodity price increases, but have not lowered them as the commodity prices have declined recently.

Manufacturers respond that their price increases were not excessive in light of the cost increases they had previously absorbed. This graph offers some support, showing that producer prices increased more than consumer prices for the seven quarters preceding Q4 '08.

Nonetheless, retailers are threatening increases in private label and possibly dumping uncooperative suppliers. SuperValu's CEO noted that "In almost every category, you have other vendors to look to."

It appears that suppliers may be trying to compensate for the increases by bumping up their trade spend:

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.

The Cincinnati Enquirer carried a similar article, noting that Walmart is talking tough:

"We worked with them when raw-material costs rose," said John Simley, a Wal-Mart spokesman. "Now that they've dropped, we want to see prices come back down. Our suppliers know we are the advocate of the consumer."

NRF predicts return to growth in Q4

The National Retail Federation predicts that sales will be down 2.5% in the first half of 2009, down 1.1% in the third quarter, but will rise 3.6% in Q4 (compared, of course, to weak sales in Q4 '08).

They also think that retailers have now reduced inventory enough that price-cutting will abate a bit:

"Because of what's happened, retailers are being more conservative with inventory, and so the need to have that panicked price-cutting is lessened," says Wells. And in addition to better inventory management, adds an NRF spokesperson, stores are "trying to be efficient as possible, to do more with less in their advertising, and sometimes changing their merchandising mix."

Abercrombie stays on the high road

I posted an item last month on the horrible results Abercrombie & Fitch was posting, and the punishment they were taking on Wall Street as a result. The numbers (-24%) continued to be awful in December (although that was slightly better than November's horrific -28%).

A&F continues to refuse to cut prices. I visited one of their stores just before Christmas and there were no markdowns in the store. There were also practically no shoppers. As I said last month -- I admire their stand on the principle of maintaining their brand image, but it's going to be interesting to see if they can continue to do so if the recession lasts much longer.

Resale price maintenance in a recession

I came across this study from Japan, Demand Uncertainty and Resale Price Maintenance, which argues that RPM in conditions of uncertain demand will be "profitable for the manufacturer and not damaging to the retailers."

I am embarrassed to admit that I had not before now given any thought to how RPM might have different effects under current conditions than it did a year or so ago at the time of the Leegin decision that changed the law on RPM. The position taken by the paper may well be true in Japan where, the author tells us, retailers have the right of full return on unsold merchandise. That is not generally the case in the US (other than for books and perhaps a few other categories).

Which raises some questions (and I'm not going to pretend I have answers). If I were a retailer, I think I'd be reluctant, in the current retail environment, to buy merchandise covered by RPM policies unless I were given return guarantees, for fear of being stuck with unmoveable inventory as other retailers cut price on competitive products. Are manufacturers giving return guarantees in such cases? If not, are they offering other solutions (perhaps sale periods when price-cutting is allowed, or inventory financing allowances)?

This is a good time for a reminder that the FTC will be offering workshops on RPM -- more info on that here.

Who pays for all the markdowns?

The practice of guaranteed margins, common in the department store channel, is being questioned by suppliers who are staggering under the weight of all those huge markdowns we're seeing.

Clothing makers, balking at the deep holiday discounts offered by retailers such as Macy’s Inc., may force department stores to eat more of the markdowns.

Liz Claiborne Inc., HMS Productions Inc. and a raft of apparel companies plan to push back at the retailers who have slashed some prices by 70 percent amid what’s shaping up as the worst holiday shopping season in four decades.

Some analysts are saying that stores used to guarantees of 40% may have to settle for 35%, and that mid-range stores like Penney may see their guarantees cut from 35% to 30%. The cuts could save suppliers a billion or more. There may be some interesting conversations at the NRF meeting next month.

Abercrombie takes the high (margin) road

While practically every other retailer is cutting prices, Abercrombie & Fitch expresses fears that price-cutting would damage its brand image. I'm a big believer in maintaining the brand, but I must admit that I'd probably be willing to compromise my principles in the face of sales figures like these:

While just about everybody was down in November, I don't think anyone else was -28%. The positive, though is that A&F has maintained not just their brand image, but also their margins:

Gross margins at American Eagle slid 6.4 percentage points to 41% of sales in the third quarter, while at Pacific Sunwear they fell 4.9 percentage points to 28.7% of sales. Abercrombie, meanwhile, closed the quarter with relatively high gross margins of 66% of sales, with a much smaller decline of 0.2 percentage point.

So maybe A&F's bottom line isn't suffering much more than it would with price-cutting, in which case protecting the brand makes sense. A question remaining to be answered, though, is what happens when the inventory backs up. The WSJ article says A&F is maintaining normal inventory levels, but if sales are down so sharply, then there's going to be a lot of stuff gathering dust on the shelves in January, meaning either huge sales or stale merchandise.

It will be interesting to see how this works out.

Private label increases retailer leverage

Wall Street Journal reported on current increases in sales of private label products, and made a case for those increases improving the bargaining position of retailers vis-a-vis their brand name suppliers, with particular emphasis on the increases in trade promotion funding that may result.

Private-label gains come as some name brands lose market share, a shift that industry experts say could benefit grocers on several fronts in their dealing with suppliers. To help further promote their brands, branded consumer goods companies may have to kick in more to a retailer's marketing fund to pay for discounts, two-for-one offers or prime placement in supermarket circulars. Retailers may also get juicier rebate offers from their suppliers, as incentive to help push sales of branded products.

Since PL still only amounts to 16% of volume and with many brands still having a powerful allure to consumers, retailers need to find strategies that balance their marketing of PL and brand names. Trade promotion and pricing will be an important piece of that balancing act..

Part of that strategy may come to include more so-called trade funds that grocers receive from national brands to promote their products in various ways, Karabus's Mr. Weintraub said. This money is usually hashed out in annual contracts, which, with the changing landscape and end of year coming up, are producing some interesting discussions right now.

Additional talks will likely center on price increases that national brands pushed through to retailers throughout the past year as costs for ingredients and fuel rose.

The increasing role of private label and the effect it will have on trade promotion funding and pricing points out (yet again) how vital it is that brand marketers have effective tools for analyzing and optimizing their promotional efforts.

Displays are more effective than price cuts

A study by Ogilvy's shopper marketing arm says that in-store displays drive more impulse purchases and more brand selections in considered purchases than price cuts.

OgilvyAction's research from the spring indicates that 29% of U.S. shoppers impulsively buy from categories they didn't plan to when they entered the store. Of that group, 24% said they were influenced by secondary displays (away from the product's usual aisle), 18% by in-store demonstrations, and only 17% by price promotion.

The study also found 39% of U.S. shoppers have a category in mind but pick their brand in store, and of those, 31% were influenced by in-store demonstrations -- more than the 28% by price promotion and the 27% influenced by some other form of consumer promotion.

I'm always suspicious of surveys based on what shoppers say influenced their decision, but this seems like a reasonable result, and is in line with previous studies I've seen. Most studies I recall, however, indicate that the best results come from combo actions, e.g., display + price cut or, better yet, ad + display + price cut.