Anticipating inflationary action…again: Talk of high inflation is not new to the UK in the last few years. Peaking at 9.6% overall in October 2022, businesses have been grappling with price management for nearly two years¹. September 2024 figures put inflation at a more palatable 2.6%², however the cumulative load on consumers has impacted purchasing behaviour and sentiment as reported by ONS Opinions and Lifestyle Survey: by August 2024, approximately 60% of adults were spending less on non-essentials and 44% shopping around more.

Further cost pressures: The 2024 autumn budget announcement is anticipated to challenge the pricing environment yet again. Increase in national insurance tax by 1.2 percentage points as well as increase in national living wages by 6.7% for over 21-year-olds will challenge how retailers manage future growth and protect against margin losses.

How brands plan to react: The government has signaled that businesses have multiples ways to manage budget changes, from finding efficiency gains or wage increase management to absorbing some margin loss. Market reactions thus far indicate that the budgets changes could result in an even wider set of reactions:

• Absorbing the changes: Retailers with higher margin buffer or a track record of absorbing inflationary pressures may choose to do as suggested and continue pursuing cost management actions in lieu of charging higher prices.

• Re-financing / re-structuring: More labour-intensive businesses and service providers see themselves running out of ways to offset cost pressures. Some of these players are already seeking out solutions such as re-financing or even selling.

• Increasing prices: Several retailers and hospitality providers (including fashion brands, grocers, QSR brands and pubs) have indicated they anticipate this will translate into price increases. While the exact circumstances differ, intense pressure to increase prices and do so quickly is reminiscent of the steep consumer price rises seen in 2022.

What have we learned from the past two years of inflationary pressure leading to price increases?

A case study:

• Situation: A retailer managing wage and material cost inflation by putting through price changes to consumers. Some brands have put through iterative increases exceeding 20-30% in total on food and menu items in less than two years.

• Resulting product and price distortions: Iterative price increases resulted in entry-level or gateway products becoming so expensive that they no longer fulfill a role as a recruitment item. Unstructured price increase drove distortion of price hierarchies, further exacerbating retailers’ ability to cross or upsell items to drive revenue growth.

• Consumer reaction: We saw multiple, simultaneous moves. While some consumers took the hit to their wallet, the retailer also saw reduced number of items per basket, drop in , trade-down to cheaper items, and shifts to more wallet-friendly shops as price-value perception declines. Loyalty is indeed limited. Even high frequency consumers will eventually hit a critical threshold where they will walk away.

While budget changes will not kick in until April 2025, we have seen many retailers and hospitality providers go through the scenario presented above. Now they will not only be faced with the question of correcting the potential damage of past increases, but also further impacting growth through additional inflation. Some brands may indeed seek to avoid price change for now, but for those who do, there are smarter ways to approach it.

Questions to ask:

• Is there a clear understanding of how price increases impact volume?
• Are there items that could still absorb price increases without losing traffic or would instead generate more revenue though lower prices?
• Are price changes purely cost-driven or are they also consumer and competitor led?
• Where are brands in danger of exceeding critical price thresholds? What if a brand is more premium – does it have more leeway to increase price?
• How can price changes be managed to support upsell and cross-sell?
• Do price increases mean that promotions need to become even steeper?
• How will price changes impact customer acquisition and retention?
• What implications do price changes have for new product development and assortment management?

To transform your growth strategy and drive success, check out Consumer Goods & Services Consulting | CPG Consulting | Simon-Kucher or reach out to farah.thalji@simon-kucher.com.

Notes

¹ ONS reported annual CPIH inflation for food & non-alcoholic beverage and restaurant & cafes peaking at 19.2% and 11.4% by Feb and March 2023, respectively.

² Food & non-alcoholic beverage and restaurant & café inflation were at 1.8% and 4.6%, respectively.