FMCG / Retail Pricing Strategy

The FMCG and retail industry has come under substantial margin pressure in recent years.

Insight

The FMCG and retail industry has come under substantial margin pressure in recent years.

The growth in traffic through budget stores like ALDI and the increasing adoption of online shopping platforms has seen traditional high street retailers losing volume to competitors who offer larger ranges and same day delivery to customers.

Retailers are having to contend with low-cost operators such as ALDI expanding their once limited product range to take an even greater share of the grocery wallet.

Retailers such as Myer have seen their traditional markets eroded by a profusion of online platforms such as the Iconic. Global retailing giant Amazon has also announced plans to open an even greater presence in Australia which will create substantial pressure on a wide range of retailers.

Investment analysts have already identified that many high-street retailers will have up to 20% of their profits reduced by the Amazon presence.

With Coles and Woolworths determined to protect market shares with reinvestment in lower prices, FMCG manufacturers are under even greater pressure to give up margins to the major supermarkets.

Coles and Woolworths have employed aggressive price promotions and discounts of 50% off branded products to drive store traffic and capture gross margin dollars. These tactics are designed to attract shoppers who then make full price purchases as part of their weekly or in many cases twice weekly trolley shop.

Excessive discounting across all retail formats whether they be in FMCG or general merchandise is having the effect of heightening consumer price sensitivity and decreasing baseline sales made at full price. In this new retailing model, prices and price architecture now needs to be more scientifically developed and designed to flex with the new market reality.

The introduction of whole number pricing by Woolworths in April 2017 is an attempt to use price to position Woolworths as being a simpler more transparent place to do your shopping. This pricing strategy will ultimately place further pressure on suppliers to give up margin to maintain round number price points.

As a result, there will be further pressure on pack size formats and investment in R&D and brand building.

Retailers and suppliers to the retail chains have an opportunity to work more closely together to develop more effective and profitable pricing strategies. They need to build a price architecture that optimises margins on key lines and still ensure they are perceived as competitive vs. alternative channels such as online or low-cost budget chains.

The development of sophisticated algorithmic pricing is a key opportunity to improve profitability.
As discount and markdown budgets grow as a percentage of total gross revenues, it is critical that control of discretionary pricing be implemented and aligned to the right strategy.

Training of sales staff in how to sell value is one key area of opportunity for retailers who sell high-value items such as consumer durables or jewellery.

Line-item pricing optimisation of the range is another key opportunity to improve profitability.

Expertise

Pricing Insight’s experience in the FMCG retail sector is substantial, spanning over 20 years.

We have helped one of the largest farmed salmon companies in Australia develop a pricing strategy to improve profitability whilst working with a major Australian retail chain.

We have helped one of the largest fitness centre companies redevelop their pricing in the face of cheap low-cost 24/7 gym proliferation.

We also work with bulky goods retailers, consumer durable and electronics OEMs and ASX listed retailers with over 150 retail shop fronts in Australia.

Areas we can help your business include:

  • Development of customer value drivers
  • Designing a pricing strategy aligned to your business model
  • Redeveloping trade agreements to capture more value
  • Creating management alignment to the right pricing strategy
  • Designing and training effective pricing teams
  • Developing more effective industrial marketing programs and negotiation methods
  • Employing advanced analytics and modelling to identify margin opportunities

Next Steps

You may be wanting to develop a strategic pricing capability and move from a cost-plus culture to a sophisticated value based methodology. Pricing Insight can work closely with you at both a strategic and operational level to improve earnings and profitability.