Backlogs in international supply chains and bottlenecks in global shipping networks have caused massive challenges for customers and retailers alike, and the retail grocery industry is no exception. As essential community resources, grocery retail operators have had the challenging task of maintaining already slim profit margins despite the increasing cost of business operations throughout the pandemic. Additionally, an inconsistent supply of goods has made it tough for retailers to respond to unpredictable customer demand.
We talked with Columinate consultant Jen Christopher about price inflation and what it means for grocery stores. Christopher is an expert on grocery point-of-sale systems and has been helping stores establish systems to keep pricing updated and margins profitable since 2013.
What’s Happening at Stores
During the pandemic, 35 percent of the goods typically available were out of stock across all industries, an all-time high. While most industries have recovered to pre-pandemic supply levels, food and beverage shortages remain persistently high.“Both price inflation and shortages of goods are two factors that aren’t going anywhere soon,” says Christopher. “The cost of shipping has gone up by hundreds of percentage points. Food spoils before it reaches its final destination, and items are sometimes just simply missing from store orders.”
For grocers, the challenges of the pandemic have hit particularly hard. Particularly in smaller store footprints, space dedicated to certain products is limited. “If a certain product is out of stock, stores might not be able to replace it with another brand. It is not just about space, it is also about store values and identity. Customers have strong preferences about the products that are stocked in their store, and there might not always be an appropriate local, natural, or organic substitute for out-of-stock items.”
Frequent and unpredictable changes in the price of goods puts additional pressure on an already tenuous pricing system for some co-op and independent grocery stores. Christopher says it’s been hard for some stores to prioritize keeping their pricing up-to-date. “The frequent price changes coming down from suppliers adds a new layer of technical challenges on the pricing system and strain on ordering and data entry personnel.”
Jen’s Tips to Help Stores Deal with Price Inflation
Tip #1: Communicate clearly and often with your core shoppers.
For food co-ops, that may mean generating special communications strategies to your members. For independent grocery stores, it may mean developing special messaging to your core shoppers, emphasizing your guiding values and benefits to the community, in addition to good deals you can offer during this period of rapidly increasing food prices. Your relationship with your members and core shoppers is your greatest asset, and it’s essential that this line of communication is recognized and heavily utilized.
“Customers are going to see higher prices on the shelves [of their grocery store],” explains Christopher. “Co-ops and small independents don’t have the purchasing power to try and normalize margins for the increasing business costs, so they will have to increase their prices if they want to stay open. This is a crazy time for everyone. Acknowledging that is important.”
One way grocery retailers can do this is by hosting a community roundtable. “There needs to be a space for learning and sharing,” says Christopher. “An open dialogue can be an opportunity for both community members and store operators to share their challenges and to co-develop solutions. Even a simple explanation of supply chain issues can go a long way in gaining customer acceptance.” Keep your customers in the loop. Transparency is key.
Tip #2: Prioritize your pricing systems.
“Now, more than ever, it’s important that stores stay on top of pricing,” says Christopher.
Supply chain issues are persisting, and prices will continue to creep up. As we head into the new year, now is the time to ensure your price-update systems are moving smoothly.
“I typically suggest that co-ops create a simple tool that shows when vendor costs were reviewed,” Christopher says. “For smaller vendors, these can be reviewed quarterly, but larger vendors should be reviewed more frequently.” Also, make sure you’re checking in with staff responsible for pricing updates to ensure they’re supported in this overwhelming time.
Tip #3: If large price increases of a good are required, adjust prices incrementally.
Today, the prices of goods are changing quickly. You may run into the need to increase the price of a good significantly to stay profitable, and that’s okay.
“If you realize you need to, let’s say, increase the price of Rice-a-Roni by a dollar, the best approach would be to make a plan to stagger this increase over time,” Christopher suggests. “Increasing the price a few dimes at a time will be something customers can tolerate a little better.”
Tip #4: Don’t forget about foods that need recipe costing!
Most stores don’t have an established process for adjusting costing for their prepared foods. Even in the best of times, it’s an easy place for pricing to sneak away from you. With pandemic price surges, this could cause serious problems for your profit margins.
“Currently, chicken could be spiking in your chicken salad, and you’re only charging $7.99/lb when you need to be charging $10.99/lb. With ten different ingredients going into an item, it can be harder and less obvious to make these pricing adjustments.”
Tip #5: Review your blended margin, and make sure it’s still working.
As price changes vary, it’s important to make sure the margins for each department are being attended to.
“If you have milk at a 20 percent profit margin and truffle butter at a 60 percent profit margin, and the price of milk goes up, your overall department margin will be decreasing,” explains Christopher. “It’s a little technical, but you may find you need to adjust the way you mix your product margins to get what the store needs to thrive under these new conditions.” As you adjust the parts, keep an eye on the whole!
For more assistance with pricing and point-of-sale, check out Jen Christopher’s consultant page.
1. The figures in the article were based on: Cavallo A. and Kryvtsov O. “What Can Stockouts Tell Us about Inflation? Evidence from Online Micro Data.” NBER Working Paper 29209, September 2021. Read the full article here.
Have more questions?
Get in touch with one of our consultants.