Advice for Specialty Retailers, Producers Amid Rising Concern About Price

Mark Hamstra | 12 Apr 2021

U.S. consumers are increasingly concerned about increases in grocery prices, even though their confidence in the economy and in their own personal financial situation have been improving, according to a report from data analytics firm dunnhumby.

The report, which surveyed 48,449 respondents online in 22 countries, found that in the U.S., 43 percent of consumers said they were paying more for food than they were before the pandemic, compared with 24 percent who said they were paying less. As a result, 80 percent are taking at least one action to seek value, with the most popular action being to shop at stores with everyday low prices (52 percent). They are also searching online for sales and coupons, buying larger pack sizes (both at 34 percent), stocking up on products that are on sale and buying some products only when they are on sale (both at 36 percent).

The report also highlighted some trends that may be favorable to specialty food retailers and suppliers, however, Eric Karlson, director of strategy and insights at dunnhumby, told SFA News Daily.

“Consumers have saved an incremental $1 trillion in 2020 versus 2019, and many expect people to make up for lost time as COVID fades,” he said. “Thus, pent-up demand, a rebounding economy, and people eager to entertain friends and family, could result in a nice tailwind for premium or specialty banners in the back half of 2021.”

Karlson said that although 2021 will likely be a “transition year” as COVID lingers and consumers remain fearful, he expects 2022 “to look more like 2019.”

Specialty food retailers could also benefit from consumers’ growing interest in product quality, he said.

“We believe that the increased confidence in both the economy and the state of personal finances is leading consumers to seek more quality,” Karlson said, although the noted that consumer interest in value has not decreased, and remained relatively flat for the last several months.

The February report found that 69 percent of consumers were “value seekers” who tended to employ price-oriented strategies, the same as in November. Those pursuing quality-focused strategies rose to 23 percent, however, up from 16 percent in November.

“There is a small, but increasing, group of people who are seeking quality during COVID,” said Karlson. “They are a target market for gourmet/specialty food retailers.”

Still, many specialty retailers may want to consider the impact of consumers’ concerns about price, at least in the near term. For them, Karlson offered some advice:

• Gourmet/specialty products that are similar to mainstream products in high-volume commodity categories, or key value items, should have prices that are within a “reasonable gap” of competitors, Karlson said. “It is important to price these items more aggressively, particularly if price sensitivity is increasing,” he said.

• Be conscious of how and where to invest in pricing and how and where not to invest to avoid losing points of differentiation and making inefficient investments. It’s also important to understand how customers respond to the changes in value for the KVIs. “Some KVIs will be better served with a lower everyday price while others need a competitive price but should still see occasional promotional discounts to drive traffic,” Karlson said. “For the more differentiated items, there is likely more pricing and margin flexibility.”

• Maintaining a differentiated offering and experience can justify premium pricing, he pointed out, “assuming the store is located in the proper market.”

• Specialty retailers can also leverage their prepared food offerings, along with the consumer perception that grocery retailers offer healthier fare than restaurants, to compete as the foodservice segment rebounds, Karlson added.

Noah Munro, founder of food industry consulting firm Taste Profit Marketing and the co-founder of the Mill Fudge Factory in Bristol, New Hampshire, said most specialty producers have likely have a story to tell around their artisanal production and craftsmanship that should transcend the increased consumer focus on price.

“If you’re competing on price, then I question how special you really are,” he said. “Part of what defines specialty is that it’s about the quality, the experience, and the story.”

Smaller producers in particular need to be cautious about lower prices to compete, Munro said, because they risk losing their gross margins, especially if they distribute through a wholesaler or retailer.

Producers can also take this opportunity to revisit their own cost structures, he said, to see if there are opportunities to increase efficiencies that could drive more competitive pricing.

One way to do that is to explore the potential increased use of their production facilities to use as a co-packer or white-label manufacturer for other brands, he suggested.

“If they have their own equipment, they need to make sure that they’re leveraging those assets as much as possible,” Munro said.

Another way to reduce costs and create room for price reductions is to take a closer look at ingredient costs, he said.

“One of the things that we’ve seen again and again is that sometimes companies started sourcing certain ingredients from certain places, and they don’t necessarily revisit that frequently enough,” said Munro.

If companies really need to lower their prices to compete, they should go back to the companies that they buy their ingredients and packaging from and look for ways to work together to reduce costs, he said. That tactic can be even more effective, of course, if companies have already identified other, lower-cost sources for their inputs.

Other findings from the dunnhumby research showed that many of the pandemic-related shopping behaviors were abating. Consumers are shopping at more stores, shopping more frequently and spending less per visit:

• Forty-nine percent of consumers said they were shopping at fewer stores in February, a 14 percent drop from the start of the pandemic.

• Fifty-three percent made fewer trips to the store, a 21 percent drop;

• Twenty-one percent spent more on each trip, a drop of 17 percent; and

• Survey respondents said they made 6.4 trips (including online) to the store per week in February, compared with 3.8 in March 2020.

Related: Meijer Reveals Pandemic Shopping Trends; Instacart: Pandemic Shopping Habits Remain.