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May 27, 2024

We have been operating in an environment where food inflation is in the news, impacting consumer’s grocery orders and challenging the relationships between producers and retailers. For the last two years, food inflation was considerably higher than the all-items index, as illustrated by the Statistics Canada chart.

 

As we enter 2024, Food price inflation has subsided and dropped below the all- items index. Consumers will be excited. Producers and processors will be operating in a different environment with customers. You will shift from trying to justify an increase, to maintaining the prices you are at.

 

A graph of a price

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Source: https://www.statcan.gc.ca/en/topics-start/food-price

 

Retailers will be looking for change

 

The last few years have been a challenge for your customers, as they have been blamed for high food prices. Politicians have pointed the finger at them and consumers have organized boycotts of Loblaw. Retailers who have invested millions in creating a price image have been accused of charging prices that are artificially high.

 

As the overall inflation rate for food purchased at stores is getting close to zero, your customers will be asking different questions. The conversation will shift from ‘why is it more?’ to ‘can it be lower?’ it will be more important than ever to know the facts and understand the cost components of your products.

 

Retailers will be looking at the inputs you might have talked about increasing in recent years. If they see them coming down, they will expect your cost of goods to decline.

 

Know the facts

 

You are selling to sophisticated customers. They will know the facts, so you need to bring your perspective. They might see ‘fertilizer has decreased’ but not understand the specific type you use is up five per cent year over year. Don’t be upset that they are challenging you -- it is their job.

 

If you know the question is coming, be proactive. Be ready with the facts and help them understand the impact on your products and your cost of goods. Retailers do not always understand cost components such as freight or logistics. In their business distribution is an expense that merchandising people really are not exposed to. Many have large, sophisticated networks but they do not understand the hard costs of something such as Less than a Load (LTL) freight. They will ask for more frequent deliveries but not comprehend the incremental cost per case of moving a few pallets at one time.

 

Consumers, regulators and retailers continue to demand changes to reduce the environmental impact of the food industry. Often these improvements cost more. Sustainable packaging is great and people are looking for it. But packaging can cost more in price per unit or plant efficiencies. If you are making these changes, share the impact with your customers.

 

Adjust your mindset to a new environment

 

Many producers and processors have been operating with several price increases in recent years. This does not mean it will just continue. Retailers have had to accept increases, because the reality is costs went up. These increases were justified.

 

The climate will change as they read about decreases in commodities and inputs. Food producers and processors will need to change their approach.

 

We also know food price inflation has impacted consumer buying patterns. They are shopping more in discount stores and trading down in categories. They are doing as much as they can to keep their grocery bill affordable. This can impact your volume. Your customer might buy less if they are losing sales in their format, such as conventional stores. 

 

Consumers are buying more items with a temporary price reduction than ever. This can impact your pricing if you are selling more at promotional prices. Track your sales to ensure you can predict the cost to your business.

 

Do your part to keep prices in line

 

If overall inflation is beginning to subside, then you should also see some relief in the prices you are paying. Challenge your suppliers and do not just accept a two per cent increase. Your customers expect you to challenge your suppliers to keep pricing in line. If you are able to keep costs the same year over year or perhaps even get a decrease, let your customers know. They like their suppliers to be a champion of keeping costs in line. If you are able to get a decrease to offset an increase somewhere else that can be a win-win.

 

As we move into a new period for food pricing, the challenges will be different. The best strategy is to understand your business and focus on where your customers want to go. They will always be demanding. Perhaps they are even more demanding right now because they have been pushed into a corner. Communicate as much as possible and do not assume they understand your business.

 

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Submitted by Peter Chapman on 27 May 2024