Inflation Nation: How Retailers Are Reacting

Posted by Tracy Mullin on May 21, 2008 4:41 PM

Like most Americans, retailers have been struggling with the rising cost of fuel. It now costs retailers substantially more to buy goods from manufacturers whose own costs are rising, and it costs more for retailers to ship merchandise from distribution centers to stores.

But retail companies would prefer not to push those cost increases down the chain to customers. To avoid price hikes, many retailers have rolled out proven anti-inflation strategies:

Streamlining operations
Cutting back on inventories
Reducing part-time staff hours
Conserving energy
Buying more local goods to save on transportation
Offering incentives to keep customers engaged

When warranted, retailers will even take a hit to their own profit margins before raising the price of merchandise on shelves. All of these these strategies have worked for retailers of goods like clothing, furniture, and electronics, as evidenced by the fact that inflation in these categories is virtually zero.

But grocers and restaurateurs have been hit with a double whammy: In addition to rising transportation and manufacturing costs they’re facing a declining food supply, as many traditional commodities are now being used for fuel. (Drought conditions and poor crop yields in some regions have exacerbated the effect.)

Basic foods like corn, rice, wheat, eggs, dairy and soy have reached record prices, leaving merchants with little choice but to pass some of the burden on to the customer. Of course, many prepared and processed foods rely on these staples and thus prices for egg-, corn-, and wheat-based products are increasing as well. In 2007, the all-food price index increased by more than 4.5 percent, the largest jump since 1990. Estimates for the current year are even higher with expectations for another five percent increase.

Goods like food (and gas) are not discretionary; consumers have to buy them. Understandably customers become frustrated by inflation and retailers often become their sounding board, bearing the brunt of Americans’ unhappiness when prices rise. Retailers may want to start a two-pronged effort to off-set ill will consumers may associate with their brands because of prices.

Educate their employees. Front-line retail workers typically face the brunt of consumer frustration. But many of these workers probably don’t understand the complexities of price increases themselves. Few of us do. Giving a cashier some baseline knowledge that they can pass on to the consumer who’s raging about how much the store charges for a gallon of milk can only help.
Educate their customers. Companies should consider committing resources to advertising and signage aimed squarely at consumers. It should explain both how the retailer is trying to keep prices down and why some prices are out of their control

It should be noted that while these strategies may be executed differently in different industries, they’re management ideas with universal appeal. Employees who connect with customers always benefit from being able to give reasoned explanations to uninformed or misinformed customers. And customers benefit from being given knowledge so they don't have to ask for help in the first place.

Grocers have also implemented other industry-specific strategies. For the short-term, some grocers have adopted incentive initiatives that allow customers to cash their tax rebate checks for free, or convert them into store coupons with an additional 10 percent off.

Long-term, retailers are looking to Washington to help alleviate the price pressures. Retailers have become increasingly concerned about federal biofuel mandates, specifically corn ethanol and soybean oil, which are partly responsible for the dramatic increase in food prices. And while other factors such as rising demand from developing countries and international export restrictions play a part, biofuel mandates are the one factor over which U.S. policymakers have direct control. If slowed or removed, retailers and restaurants believe biofuel mandates could have an immediate impact on food inflation.

Inflation, particularly in food and fuel, is a very real concern to most retailers and restaurants. Once the temporary buffer of rebates is gone, consumers will have no cushion to offset these higher prices and retailers will continue to feel the pinch.

Tracy Mullin is the CEO of the National Retail Federation, the world’s largest retail trade association.

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Comments

Though I agree use of corn for bio-fuel/ethanol is having a on the cost of food, I believe that the author has over stated it's effect. Fact is increased demand, contining escalation in the cost of fuel (547%!), decline in the US dollar, decline in land availble for production, weather (drought, etc.), political export/polices, reduced production efficiencies, and increased input costs all contribute substancially more to the increased cost to consumer. Blaming corn based ethanol for the increase in may be politically correct, but it's important that "the dicussion" look at all factors not simply the popular ones

Per the US Department of Ag [http://www.ers.usda.gov/Publications/WRS0801/WRS0801.pdf]
Since mid-1999, when all three indices were at about the same level (and were about where they had been 10 years earlier), food commodity prices have risen 98 percent (as of March 2008); the index for all commodities has286 percent; and the index for crude oil has risen 547 percent. In this perspective, the recent rise in food commodity prices might not seem so severe after all. However, because an increase in the price of food--a basic
necessity--causes hardships for many lower income consumers around the world, food-price infl ation is socially and politically sensitive. That is why much of the world’s attention is now focused on the increase in food prices more so than on the more rapid increase in prices of other commodities. A number of long-term, slowly evolving trends have affected the global supply and demand for food commodities. The impact of these trends has been to slow growth in production and to strengthen demand. The resulting tightening of the global supply and demand balance has gradually put upward pressure on agricultural prices. Many of these long-term trends have been exacerbated by the more recent developments that have put additional upward pressure on world prices by further reducing supplies and increasing demand. The annual growth rate in the production of aggregate grains and oilseeds has been slowing. Between 1970 and 1990, production rose an average 2.2 percent per year. Since 1990, the growth rate has declined to about 1.3
percent. USDA’s 10-year agricultural projections for U.S. and world agriculture see the rate declining to 1.2 percent per year between 2009 and 2017.1 Growth in productivity, measured in terms of average aggregate yield, has contributed much more to the growth in production globally than has expansion in the area planted to grains and oilseeds. Global aggregate yield growth
averaged 2.0 percent per year between 1970-1990, but declined to 1.1 percent between 1990 and 2007. Yield growth is projected to continue declining over the next 10 years to less than 1.0 percent per year. The growth rate for area harvested has averaged only about 0.15 percent per year during the last 38 years.

- Posted by Tim Wentz
May 22, 2008 9:37 AM

The Executive Committee of my non-profit apparel organization discussed this very topic yesterday. While the article says one defense by retailers is to "buy more local goods to save on transportation", it must refer to groceries, but it could just as easily mean 'apparel', including fashion. Globally, the European retail super stars Zara and H&M buy apparel made locally. And, they not only make enormous margins but deliver a delightful, high value shopping experience. US retailers are overly focused on Asia, and on what is called the IMU - Initial Mark Up, a measurement that counts on mark downs. But local sourcing, driven by partnering with US and regional factories, can all but reduce mark downs, not to mention stock outs. Zara proves that retailers can make money from the (local) factories they pick. Factories in our organization are building fabulous case studies about retail direct partnering but in US retailers, the few who know this seem to be suppressed, even quieted in favor of 'savings' by long lead time sourcing from Asia of goods that, when they arrive, are soon marked down. The truth and the margins are in between - what we call 'balanced sourcing' where MUCH less is ordered from afar, and much more is made as soon as it is clear it is really selling at full margin. When a kid doesn't care that his jeans cost $65, a store shouldn't care what it costs to keep that style on the shelf, replenished in days, from factories one or two time zones on the other side of the store. We know. Zara knows. Its time for US retailers to know this too.

- Posted by Mike Todaro
May 22, 2008 12:04 PM