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A Holistic Approach Turns Notes Into Harmony
A Holistic Approach Turns Notes Into Harmony
by: Fabrizio Bianchi | July 1, 2024

Consumer Products Manufacturing price governance in a new era of complexity

Identifying the best price points requires a clear understanding of all levels of marginality. Leveraging price waterfalls across different markets, channels, clients, and products has always been challenging, and more recently, macro and industry trends have made it more difficult.

Changes in price elasticity, retailer centralization of negotiations, a shift in consumer preference toward value brands and private labels and the expansion of online shopping all impact pricing. As a Consumer Products Manufacturer (CP), you need to manage pricing by identifying the sources of potential profit leakage.

Price Governance Consumer Products

In this blog, I’ll discuss these challenges and the strategic actions that organizations like yours should take in the pricing space, to navigate this discord and protect and improve your margins.

Dynamics of price planning for global instability

Without reiterating every one of the many global disruptive changes over the last couple of years — impacting supply chains, raw material costs and the consumer price index — instability has forced companies to reinvent pricing practices used for several years.

Uncertainty and pressure on top line and net margin resonate across most CP companies. To mitigate this, you need to use technology and analytics to create “what-if” scenarios including a range of high and low fluctuations. You should also embrace advanced planning and scenario management in addition to collaborative functionalities (workflow, report sharing, scenario sharing and more) to identify financial risks at different levels of price waterfalls and optimize the right mix of pricing strategies across your entire product and customer portfolio.

A centralized arrangement avoids pricing risk exposure 

Another challenge, particularly in Europe, is that more and more retailers are moving their negotiations from single countries to a central level. I believe this trend is driven by streamlining the financial supply chain and logistics operations and the desire of many retailers to leverage their size and demand better conditions regardless of the country in which they operate.

For example, 2 major retailers are centralizing most of their negotiations for assortments, promotions and contracts with several European countries. France, Spain, Italy, Poland, Romania and Turkey are examples of this trend for Carrefour, while Germany, France, Spain and the United Kingdom are examples of this trend for Lidl. Centralization of negotiation is an ongoing trend for other large retailers, like Aldi and Tesco.

As a result, more retailers are pushing for equal trade terms, trying to reach the best conditions across different countries because varying levels are an additional source of pressure on CP margins. 

According to Bain & Company, “pricing exposure within and across customers are potentially exposing CPGs for 30 - 50% of EU profit,” quantifying the risk as a result of centralization.

Price Governance

I believe CP companies must identify which countries, retailers and product categories are more exposed to these risks and clearly quantify those risks. This clarity is mandatory to protect company profitability during negotiations with retailers and it’s essential to be able to define the actual reasons behind different pricing structures. Specific contract pricing tools are required to manage pricing risk exposure properly.

Tempo is measured by consumer behavior and price sensitivity

Consumer behavior has also dramatically changed, triggered by the macroeconomic situation. As you know, consumers are less loyal to brands, and last year’s price increases have eroded their purchasing power. Many have subsequently shifted their attention to private labels and less expensive brands. 

80% of shoppers in recent months have moved part of their shopping related to consumer products to cheaper items. Consumers are paying more attention to promotions than ever before.
Source: Circana

Price and promotion sensitivity have completely changed and are still evolving in terms of how shoppers perceive deals. Everyday low price (EDLP) is perceived differently than promotional clusters. There’s an omnichannel push to combine online and brick-and-mortar promotions. Addressing this with advanced analytics capabilities is necessary to help identify new combinations of merchandising conditions and deal offerings across markets, products, consumers and retailers.

For example, you may have more frequent and less discounted promotions on products with a more profitable PPA (price product architecture) instead of significant discounts on large pack sizes. Balancing price and promotional activities to optimize your strategy as it relates to EDLP, High-Low promotions, etc. is vital to improving sales and allocating trade spend on the most rewarding commercial initiatives.

Pitch of the marketplace and competition must be properly tuned

Ecommerce growth skyrocketed during the pandemic, and the trend is still on the upswing with a forecasted increase of 54% between 2024 and 2029, according to Statista. On average, across countries, 10% of grocery sales are done online, and more and more shoppers regularly buy groceries online.

The increase in online shopping translates to more data than ever for CPs to gather and analyze. You could say that “store checks” are now done at light speed. By enhancing Digital Shelf Intelligence capabilities, you can gather up-to-date information about prices, innovations, assortments and promotions in real time and organize this data into relevant reports, meaning CPs gain an immediate understanding of how markets are evolving and how competitors are behaving, enabling more agile price decision-making.

You can organize this data into actionable insights and use it during planning and optimization to leverage all opportunities to improve margins and stay ahead of the competition.

Melody is created with 4 key elements of pricing strategy

We know that several CPs have started to address 1 or 2 of these challenges. Yet, few have taken a holistic and structured approach combining all elements into one strategy.

  1. Identify your targets, clearly understand the optimal pricing strategies (cost plus, competitive pricing, value-based and more), including any market risks and compare different scenarios to identify the most promising one.
  2. Optimize sales processes and prices based on targets and constraints and determine the best recommendations for price corridors.
  3. Plan and execute smoothly and quickly when applying central and regional plans to local markets. Also, flex when necessary and maintain better control over outcomes.
  4. Attain ongoing analysis with Market and Digital Shelf Intelligence to support, plan and execute with price sensitivity and low-risk exposure by understanding all the components of the gross to net.