Lower Commodity Prices and Higher Profits in CPG Won’t Last Forever!

A recent Wall Street Journal (WSJ) Article, Decline in Commodity Prices Helps Boost General Mills Profit, discusses how many Food & Beverage companies with heavy exposure to commodities are currently experiencing windfall gains associated with positive hurdles - especially those with grain & fuel exposure. These profits really represent a short term phenomenon unless consumer packaged goods (CPG) companies can implement effective pricing strategies to sustain them in the long-term.

As these hurdles expire in 2010, the key challenge moving forward is - how can companies leverage their past experience to prevent the same type of margin deterioration that companies have experienced in the past.

I think it is critical for CPG companies to focus on three key areas:

1. Establish a more structured and transparent market price architecture

Establishing and utilizing Wholesale and Trade (Geographic/Channel) prices can more effectively and efficiently communicate prices and price increases to the market. The current lack of a clear pricing structure has prevented more rational pricing among competitors. This often leads to competitors blaming each other on "who fired the first shot" that led to the price war, but the end-game remains the same in that pricing gets driven lower. A more robust and transparent pricing structure can enable the industry as a whole to get better at passing on price increases to the marketplace as a whole - in other words, everyone wins! The beer industry serves as a great example of the power of this tactic as they constantly outpace the CPI with price increases in the most competitive of environments - DSD.

2. Institute stronger Retail Price Planning capabilities with customers

One of the more subtle gains from the current environment has been that as retail competition has increased in aggressiveness is that retail margins are actually contracting in many categories after years of expansion. As the market as a whole and supermarkets in particular continue to aggregate, retail price planning is going to continue to play an important part in the future winners of the industry. Safeway is a great example of an organization that is driving CPG organizations to manage their business more centrally and forcing planning earlier before most manufacturers have even started their own planning. CPG companies that do this well will have a stronger understanding of the impact of their price and trade spend, and be able to manage the retail margin conversation better than their competitors towards influencing retailer's actions.

3. Avoid short-term tactics that have long-term costs

Lastly, resisting the short-term win for the longer-term opportunity is an area that most CPG companies should focus on. Short-term tactics ranging from continuous price exceptions for the majority of customers to adding fuel surcharges fees are generally short-term wins that create long-term losses or issues as they undermine consistent pricing strategies in the marketplace. Having a large proportion of price exceptions helps initiate price wars and fuel surcharges can create negative hurdles or customer issues as fuel prices retract to prior levels. The best long-term pricing strategy is to build in sustainable increases based on end-consumer value, and to implement increases on an annual basis at a minimum. It helps condition the retailers to expect price increases every year and shift price increase conversations from being cost-based to value-based within the marketplace.

Listen to an AMR Research webinar on Trends In Pricing & Profit Management to learn more about how your organization leverage pricing to improve profits.

Contributed by Adam Corsi.  Adam is a Business Consultant at Vendavo with deep expertise in CPG pricing.