The consumer packaged goods (CPG) and Retail industry are going through a period of significant change. Both retailers and manufacturers are struggling to find growth and improve profitability. One strategy is through consolidation - e.g., Kraft-Heinz, Keurig- Dr Pepper Snapple Group on the manufacturer side, as well as Safeway-Albertsons, Ahold-Delhaize, Walgreens-Rite Aid on the retailer side. The thinking here is that these mergers would lead to large operational efficiencies and focused growth strategies.
Another important lever to drive growth is pricing and promotion. Companies have realized the importance of getting the pricing right and running high-impact promotions in a highly competitive market. As consumer shop multiple channels and new retail formats begin to permeate (e.g., smaller format stores, new entrants such as Aldi and Lidl), the importance of price-promo continues to increase. Pricing and promotion have become the second largest item on CPG manufacturer’s P&L, after cost-of-goods. Similarly for retailers, price-promo decisions have become critical for growth, maybe even survival. This is manifested in the growth in investment focused on pricing and promotion decisions. In some cases this investment could be as much as 20-25% of net revenue of the company.
However, despite the heavy investment in price-promo, the impact of these decisions is declining. A recent IRI study indicated that the price and promo elasticities (response of volume to pricing change) have been steadily declining over the past 3-4 years. Consumers are willing to buy less when faced with decreases in “regular or base” price as well as promoted price. The study indicated that the “lift” from promotions had decreased by about 1,000 basis points over the past four years. There is, therefore, an immediate need to manage price and promotion decisions in a more creative and impactful manner.
Three areas of improvement
What does this mean? What can companies do to improve the impact of their pricing and promotion investment? We believe that there are three important areas of improvement. The first area is around a more refined understanding of the impact of price-promo decisions. The new focus is on understanding the true impact of merchandising through both traditional and new lenses, including stockpiling, cross-retailer pricing and advanced price engines. Being able to more accurately predict the pattern of consumer behavior allows for automation and faster and better decisions.
The second area is around rapid and dynamic decision making. This involves a focus on new techniques such as Artificial Intelligence and Machine Learning to drive price-promo decisions. AI/ML is already getting entrenched within demand identification, product development and in-market execution as well as marketing. Within CPG and retail pricing, this will be accomplished by (a) speed in dealing with the regularly-repeated manual tasks in an efficient manner and (b) new levels of insight and accuracy based upon market trends that enable pricing analysts to focus their efforts on the areas that matter in a dynamic manner. It is imperative to move from a user-driven, manual pricing adjustments to dynamic “smart solutions.”
Another important area of change in pricing and promotion is “personalized pricing;”that is allowing manufacturers and retailers to customize price-promo decisions towards individual consumer/shopper segments. This is done by combining frequent shopper (FSP) data with traditional price-promo modeling for an in-depth evaluation of merchandising strategies as well as developing custom offers that would stimulate demand within these segments. IRI research shows that FSP/loyalty card holders react differently to brand price changes. For example, Brand Loyals react stronger to base price changes, while Brand Non-Loyals react stronger to base price reductions, promotional prices and quality merchandising tactics.
In our session titled “New Frontiers in Pricing Analytics” at the SAS Global Forum 2018, we will provide a detailed overview of the state of the industry and how it is evolving. We will provide an overview of the new techniques and technologies in this space as well as where things are headed in the future. We hope to see you there.