How Canny Companies Are Coping with Inflation

Sep 7, 2022

A recent column in The Economist cut straight to the chase: “Inflation is making up for lost time. A word that many thought had gone the way of peroxide hair and trench coats in the early 1980s is now back on almost every CEO’s lips as they run through a barrage of compounding shocks – war, commodity crisis, supply-chain disruption and labour shortages – in their companies’ first-quarter results.”

Consumer Marketers vs. Regular Consumers

As we all know, the cost of living is skyrocketing, especially in those areas of daily life delivering the first-hand impact of rising prices: The supermarket. The grocery store. The market. Whatever you want to call it, it’s one of the prime places where we’re all feeling the pinch.

In our view, consumer marketers have a better understanding of how to cope with inflation than most regular consumers do.

So, while our explanation of how consumer marketers operate won’t lower the price of products any of us buy in stores, it will help us all to understand how product price increases are managed by those companies savvy enough to orchestrate them successfully.

As The Economist reports, when it comes to inflation: “In general, some of the best-known companies are coping. After years of negligible increases, they have managed to put up prices without alienating the consumer. How long they can continue to do so is one of the biggest questions in business today.”

Here’s what they get, and we the consumer (possibly) do not.

The Role of Consumer Sympathy

Consumers know that something out there in the world of retail has changed. War is being played out on TV. The pandemic hasn’t quite left us. Supply chains have been interrupted. Consumers know that sales of most consumer goods have slowed, particularly during the pandemic, and that there is catching up to do. Accordingly, we expect prices to rise and we’re tolerant about those rises provided they appear to be reasonable.

Pricing Power

Pricing power is the ability to raise prices to maintain or expand margins without curtailing demand or losing share to a competitor.

For many companies, winning in an inflationary environment will depend on how indispensable their product or service is and where they sit in the value chain. It’s not just about being able to raise prices. You need to do so without impacting demand and profitability. Pricing power is always important, but more so in inflationary times.

As The Economist comments: “The immediate advantage goes to those with the strongest brands and market shares.” Coca-Cola is a case in point. This brand of fizzy drink commands almost 50% of the world’s $180 billion (that number is not a typo) fizzy drink market. Yet in the last two years they have, according to The Economist, “used price and volume increases to deliver bumper earnings” – an achievement they report as a “masterclass in pricing power.”

Premiumization

The word premiumization may sound technical, but it’s not. Brands with considerable power – especially premium brands that are already pricey – can get away with price increases and the consumer will not flinch. Nestlé’s Purina pet-care division sells Fancy Feast, a product which The Economist reports, “achieved the largest price increases across all categories” during the first quarter of 2022. As it turns out, consumers will open their wallets for premium pet food.

Shrinkflation

This is a phenomenon we’ve all witnessed, and it’s something the big consumer marketers are experts at. If you can’t raise the price, why not shrink the product? According to The Economist, Hershey’s, the American confectioner, “proudly recalls how in the 1950s it responded to fluctuations in cocoa-bean prices by regularly changing the weight of the bar, rather than the five-cent price.”

As reported by Global News: “From toilet paper to yogurt and coffee to corn chips, manufacturers are quietly shrinking package sizes without lowering prices. It’s dubbed shrinkflation, and it’s accelerating worldwide.

In the U.S., a small box of Kleenex now has 60 tissues; a few months ago, it had 65. Chobani Flips yogurts have shrunk from 5.3 ounces to 4.5 ounces. In the U.K., Nestlé slimmed down its Nescafe Azera Americano coffee tins from 100 grams to 90 grams. In India, a bar of Vim dish soap has shrunk from 155 grams to 135 grams.”

Conclusion

For the most part, consumers are managing these developments. Of course, there is the obvious exception of low income earners and those on a fixed income, who are more significantly impacted by inflation – but largely, consumers are coping. They’re taking the inflationary shock in their stride, though not without some monumental grumbling – as so many of us have engaged in on the drive back from the supermarket.

Reports The Economist: “As chief executives have repeated in recent weeks, the sensitivity of shoppers to rising prices, or what they (and economists) call price elasticity, is not as bad as they had feared.”

And The Economist warns: “Many consumers may not know yet how convulsive an inflationary environment can be. If prices continue to increase, and outpace growth in incomes, eventually the shock will sink in.”

It hasn’t happened yet, but it might.

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