2022 a watershed for price…
While 2020 was a mixed bag for most FMCG companies, the Australian Grocery Industry did reasonably well. We saw many retailers and manufacturers post solid profits driven by COVID pantry stocking, eating at home and reduced promotional intensity.
The first half 2021 has rolled on in much the same way 2020 ended in terms of retail sales. The expected ‘big drop off’ hasn’t really happened yet.
Behind the robust retail sales lies an emerging problem, exploding costs! Many suppliers are reporting serious cost pressures as a ‘perfect storm’ of Covid, freight issues, variable harvests etc. hit simultaneously in 2021! The uncertainties of 2020 left suppliers reluctant to shift pricing, the pressure now in 2021 is, as a result, all the greater.
Freight costs are exploding! Importers are facing into not only significant increases in shipping costs from many parts of the world, but also the ability to even secure container places. Products which are less ‘volumetrically value dense’ are particularly impacted.
They are often sourced from countries which are more capacity challenged to begin with, and container backlogs and shortages are compounding the problem. Shipping rates out of Asia are in many instances up over 500% and the competition for capacity is going to see these intensify over the next 12 months. We will likely not only see freight charges increase further but also availability issues that will impact in store.
Materials. We’re seeing costs rising across the board, with steel for canned goods rising 30- 40% over the last 6 months according to David Buchanan from the Australian Steel Association in a recent ABC report. Grain crop damage across the eastern seaboard, high canola prices and the continued increases in fruit and vegetable prices, show that input costs are unlikely to fall back any time soon. European harvests have been very mixed driving many commodity prices up significantly. Cooking oils (canola etc) have increased dramatically in the past 12 months, in some instances by up to 100%.
Everything else. Labour supply and the impact of lockdowns are all impacting on the productivity of local manufacturers, with importers facing their own challenges driven by even more dire situations in their sourcing countries.
These mounting pressures are going to force suppliers to rethink their pricing strategies in H2 ’21 and H1 ‘22.
So where does this lead us too? We believe the back half of 2021 and 2022 is going to be the watershed for Australian Suppliers.
Many have not achieved material price increases in many years and of those that have, retailer pressure to ‘mitigate’ or ‘hand back’ those price increases have had many banking little of those increases and at best, treading water.
Retailers still seem to be stuck in the ‘half price or better’ and ‘we’re the cheapest’ rut, a glance at any catalogue or a peek into the ‘email offers’ confirms this. So, any conversations around price are going to continue to be difficult ones!
If you’re in the process of preparing for a wholesale price increase, we would highly encourage you to make sure your teams are up to date on the latest Grocery Code of Conduct Laws as there are several provisions which were included in 2020, which are relevant to price recovery.
Over the past 3 years the NextGen team have worked on well over 100 price increase requests with suppliers (more than any other consultancy). We consistently help suppliers achieve over 95% of the submitted number (80%+ get 100% of the ask!). We have a team of coaches that can support you in getting the best possible result with your customers, click the link to contact us!