20 actions that retailers should be taking during inflationary times

dunnhumby recommends 20 key strategies and tactics that retailers should be taking at this present time of perhaps the highest inflationary rates in their Customers’ lives, and in their own professional careers. Extraordinary times call for an exceptional understanding of, and focus on changing Customer needs and habits, along with uncommon courage to change business practices so that the burden of inflation is not solely shifted onto Customers via price increases.

These steps are presented with more context in our recent publications called The Best Customer First Strategies for Inflationary Times: As inflation rises, here are five opportunities to grow Customer loyalty and sales and Customer First Business Practices for Inflationary Times: Customers should not shoulder the full burden, and price increases are not inevitable. Please refer to these documents for additional background and conversation.

Of course, each of these steps should be informed by data science and activated with top priority.

1. Refresh your Customer Understanding

Re-examine the foundational Customer segments and language. Customers will not experience inflation in the same ways and they will only really notice when they get to the till and see the impact on their total basket.

• Shopping Habits, e.g., changes in frequency, spend, and loyalty (including retention or churn) amongst key Customer segments
• Customer affluence, e.g., changes in number and spending by price-sensitive Customers
• Shopping Missions and Channels
• Changes in sales by format / banner or channel, decomposed as a function of changes in Customer behaviour
• Attitudes, needs, and mindsets resulting from the traumatic pandemic experience

2. Review your Customer Strategy

From this Customer knowledge refresh, you should also review your Customer Strategy to ask:

• Are we still focussed on the right strategic group of Customers, e.g., should we shift to think more about value-seeking or price-sensitive Customers?
• Should we elevate any of our commitments (Customer Promises) to Customers, e.g., ‘Fair prices everyday’, knowing that shoppers are seeking even greater value? And how can we do this?

3. Reduce the assortment in key categories to improve value perception and cut costs

Category resets are amongst the most significant tactics to help retailers ensure they mitigate passing inflation fully onto Customers

• Make the range work harder to save on cost-to-serve and improve value perception
• Simplify choices for shoppers. Eliminate duplicate products that satisfy the same shopper need-states, aiming for breath of choice over depth
• Understand which items can be safely delisted without losing sales or profit. The pandemic has taught most retailers that they do not need as many items in their range; the data science typically proves that as much as 20% of the assortment can be delisted without negative consequences for Customers or to commercial results (and, in fact, toward actually improving sales and profits)
• Optimising the range often increases negotiating leverage toward lowering the cost of goods, given multiple competing / substitutable brands.

4. Reduce inventory to liberate working capital that can be reinvested in price

Understand which ranges can be optimised to reduce inventory towards liberating working capital

• Know where flexibility around stock levels and availability really matters, so that your organisation can worry only about the right categories and products.
• Innovate with new products and private brand items cost effectively and considerate of unmet consumer needs

5. Focus on getting more Private Brands into the basket

The presence and availability of private brand products is a great inflation fighter, with benefits even beyond a cheaper total basket at checkout.

• A wide range of own label items can also help to encourage a sense of value choices within a retailer’s range, something that improves perceptions of value in and of itself. And even when a shopper ultimately opts to purchase a CPG branded product, the awareness of a better value alternative can have a positive impact on sentiment, especially during inflationary times.
  • For more information about Private Brand strategies and a best-practice framework for development, please see your local dunnhumby representative, or read dunnhumby’s report Why Private Brand should form part of every Retailer’s growth strategy.
• Show a clear price advantage to national brands (e.g., 15-20% cheaper) and position with a logical and consistent flow on shelf (e.g., always to the left of the national brand).
• Consider offering a quality guarantee on private brands, like “try it and like it or get the national brand free”.

6. Supply chain challenges: not all out-of-stocks are created equal

Days-on-hand (DOH) targets for some non-core minimum (non-Customer Priority items, based on science) can be raised, potentially releasing working capital by reducing the inventory balance to target.

• For example, if a DOH target for a ‘non-Customer Priority’ SKU is 45 days, and the new DOH forecast demand target is raised to 60 days (with a $50,000 inventory balance) because the product is non-‘essential’ to the core range, you can release more than $12,000 in cash back into the business on just this one SKU

With tens of thousands of inventory items, this can be a significant area of opportunity

• ‘Customer Priority Assortment’ thinking is also useful to validate the reasonableness of the set points (inventory target levels), order points (inventory level where replenishment orders are placed), service level from the DC, and the overall stocking schema (number of facings, etc.)
• Optimising / reducing the assortment effectively and with less risk requires Customer insights!

7. Ensure price competitiveness on the right items – you don’t need to be cheap on every item

The KVI (key value item) list should be reviewed again considering changed shopper needs and habits during the pandemic, plus the supply and demand shocks that the industry is currently experiencing.

• Price Sensitive and vulnerable shoppers are finding this inflationary period to be particularly tough, so an even deeper investment on KVI pricing might be required.
• Re invest in base prices on essential products – in those categories that will drive volume for your best price-sensitive (PS) Customers. Compete only where you need to without overinvesting
• Online channels should continue to also reflect in-store prices, and certainly not diverge during this time, particularly on the KVIs!
• Pricing Optimisation software enables best practices in managing a high number of price increase requests at once whilst balancing all other parts of the value equation.

8. Get the balance of EDLP v. Promotions right in the right categories

Use the science to rebalance how prices and promotions work together to deliver real value

• Use the science and the data-led frameworks called Compass (aka Balance Matrix) and Category Roles & Levers to define category and product strategies that strike the right balance of price and promotion. Some categories and product deserve a more “strategic EDLP”- based tactics, whilst others benefit from even more promotions.
• Develop a Communication plan balancing price image drivers and trade driving, using both mass and personalised media

9. Streamline promotions schema and types to conserve costs and preserve stock availability

Most retailers execute several different types of promotions across the store at the same time, including percentage-discounts, flat cents-discounts, BOGOF, multi-buys, multi-save, and conditional discounts. These many types add confusion for shoppers, complexity for operators, and costs throughout the enterprise.

• The best practitioners amongst our clients focus on consistently offering only 3-4 promo types, thereby reducing costs. Simplicity for Customers helps improve value perception
• During inflationary times, all forms of multi-buys must be more strategically applied. For example, BOGOF promotions do not increase the total basket cost, but all other forms do.
• But BOGOF promotions can dramatically affect stock availability, thereby putting even more pressure on supply chain challenges

10. Deliver fewer, more efficient promotions overall

An almost reflexive response to inflation – but not the correct response for building sustainable sales or longer-term loyalty in our experience – is to increase the number of promoted products each week. In fact, the percentage of retailer sales on promotion is edging back up to pre-COVID levels, again approaching 40-50% of sales (according to our data).

• Cut the long tail of promotions that don’t work for the business or for Customers
• Remember:
  • Most trade promotions are ineffective in the first place. Inflationary times offer a great opportunity to reset promotional strategies to save money and margin that can be reinvested elsewhere.
  • Increased promotional activity has a knock-on (negative) effect vs. pricing position in high-low strategies and tends to erode overall value perception, creating a kind of vicious circle of more promotions = poorer value perception. And this is particularly harmful during inflationary times.
  • Ever-increasing promotional dependence is not sustainable against the growing Discounter/ Modern Convenience channel
  • Promotions are necessary for driving consumer excitement and stimulating demand in certain categories – but not in all. Getting the price v. promotion formula right in each category using Customer data science will be even more critical during times of inflation.
• Continue to use personalised offers and targeted promotions to drive frequency and spending.
• Don’t forget fresh. As consumers face into variable inflation even by category, we think it imperative for retailers to institute selective pricing and promotional efforts for perishables and fresh items in the basket mix. Conversely, higher expected inflationary pressures in some core centre store categories – but not all – calls for precision pricing and promotion to minimise overinvestment.

11. Convert some promos to lower EDLP using a net-effective pricing approach (via the science).

A client grocer determined that Customers now don’t want so many promotions that force them to shop around every week to find value, and that heavy promotional activity is counter-productive to building loyalty. So, they made a new promise to Customers: ‘no need to shop around for value day-in and day-out’.

• The retailer reduced promotions by 8% of sales, converting those former promotional investments into lower everyday prices (using category roles data science)
• They also introduced member pricing to better reward loyalty via the card and to save markdown v. ‘wide open’ promotions

12. Reduce activity-based costs and complexity

Poor promotions and some forms of ‘proof of performance’ cost store labour, increase operational complexity, and can even damage value perception.

• The same client noted above realised a 26% reduction in activity-based costs at store level relative to promotional execution and signing, whilst at the same time earning a +430bps improvement in brand favourability perception and a +530bps improvement in value perception
• Another retailer case study of activity-based costs showed considerable hidden costs of delivering promotions, including store labour to sort / validate / hang shelf tags, tag print costs, and process management to be $1 per tag for ‘promotion highlighter’ tags on electronic shelf labels and $1.50 per tag for SKU-specific paper shelf tags. Eliminating the 30% of ineffective promotions (using Customer data science, of course) saved $1.5m per week in activity-based costs within a retailer with 1000 stores.7

13. Rethink Trade Planning

Disruption to the traditional model that now puts supply over demand means that more than ever; grocers and CPGs cannot simply follow last year’s promotional plan – and we see this disruption continuing at least throughout 2022.

• Seasonal and event promotions have changed. Understanding shopper attitudes and future intentions around key events will be an important data point in event planning over the foreseeable future.

14. Focus on front margin, and away from back margin

We are suggesting a Customer-insight led view of certain ‘pay for performance’ requirements that sit behind some back margin practices which can contribute to higher shelf prices. Admittedly a controversial topic, back margin practices deserve honest examination particularly during times of high inflationary pressures, when the goal should be meeting Customers’ needs in the most efficient way to ensure we can remain competitive.

• Taking the weekly ad flyer for example, vendor funding for front page placement often does not offset the lost margin dollars on other products cannibalized by the feature, or for the activity-based costs mentioned above. The data tells whether the feature works to drive accretive sales and loyalty.
• Data proves that back margin practices can unwittingly create costly inefficiencies (and ultimately higher prices); for examples, listing fees for products that don’t sell or featuring products based on a trade ‘investment’ rather than on Customer appeal – subsequently, the promotion really doesn’t work for the brand or the retailer, and certainly not for the Customer.
• More often than we’d like to admit, we see poor-selling or low-profit products taking up valuable shelf space, placed based on some form of ‘support payment’ on the back margin, earning a relative pittance on the front margin and even less Customer loyalty.
• There is not one answer to this complex and controversial question, certainly, but looking to the Customer data is a critical step, especially during times of inflation.

15. Help Customers find smarter and easier alternatives

Re-examine the holistic value perception drivers, particularly to:

• Make the store easier to shop. Substitutability is the science of how unique or similar shoppers perceive a product to be, looking at cross shopping between two products in the range, and in the same or in separate baskets, to determine which are substitutable or complementary. Applying this science makes store fixtures easier to shop for Customers and helps them better find the right products for their needs and budgets.
• Help Customers find cheaper alternatives, for example, using the science of complementary product choices and API services to enable personalised ‘recommenders’ on all mobile apps and online channels.

16. Uncover new sources of revenue

• Monetise insights and media to reinvest in Customers. Critically, the big profit source isn’t just the direct revenues / income from insight and media; the much bigger prize is the extra sales growth these generate.
• Consider new partnerships. Build an ecosystem of partners to help share the burden of meeting new Customer expectations whilst also generating new sources of revenue. Notable recent partner ecosystems include Kroger + Bed Bath & Beyond, Target + Ulta Beauty, Hy-Vee + DSW shoes, HEB + James Avery Artisan Jewellery, and Morrisons + Amazon.

17. Consider helpful service trade-offs

Being Customer First does not mean being always all things to all Customers; rather, it means doing the right things for strategic Customers at the right times.

• Customers understand trade-offs, like self-scanning and reduced service department hours in exchange for cheaper prices or a more frictionless experience; the trick is to use the Customer data to understand which services Customers value more or less. And from this analysis, to find efficiencies that help reduce prices or even improve the shopping experience.

18. Your ‘Digital Transformation’ also means adding helpful services

Today and in the future, Customer expectations around ‘digital’ are not limited to online channels alone. Digital innovations that make shopping easier, faster, safer, and lower contact will all be sought after, with shoppers looking to retailers to deliver useful and helpful new applications.

• Pre-trip planning applications that enable crowd avoidance based on levels of in-store custom, e.g., list builders
• Recommender apps to help make shopping choices easier, like ‘my usuals’, ‘my personal promotions’, and curated guide apps like ‘cheaper alternatives’ and ‘healthier alternatives’
• Touch-free replacements for loyalty cards, coupons, receipts, reward vouchers, and payment
• Self-scan mobile apps and self-service checkouts, and any additional technologies that reduce one-on-one contact
• Paperless adverts and personalised promotions via a mobile app

And all these digital services can also help manage store labour costs and advertising costs, therefrom reducing pressure to increase prices to Customers whilst maintaining profitability during times of inflation.

19. Reduce packaging costs to lower shelf prices – and become more sustainable

One independent study concluded that over packaging adds 7% to the cost of an average annual grocery bill. The study urges more ‘clear price signals’ to help consumers avoid certain types of packaging to save money at the store (reference cited in the thought leadership paper).

20. Consider new loyalty reward mechanics

There are two new types of loyalty mechanics that benefit Customers making longer-term commitments with greater stability in prices – subscription offers, and fixed-cost delivery passes. We think that retailers should consider both to help mitigate price increases, particularly during times of inflation.

• Fixed-cost delivery passes are an important lever for earning Customer loyalty amongst a consumer base that has dramatically shifted to digital shopping. These passes aim at keeping a greater share of spend by helping online shoppers save money on delivery fees and give options to secure delivery during busy peak times.
• Subscriptions can help win or keep loyalty in todays ‘subscription culture’, particularly against the online category killers (think Chewy or Holland&Barrett). There are two interesting in-store subscription models emerging in grocery that bear watching:
  • X5 Group “Package” loyalty scheme that earns cash back and free services in store.
  • Coop Denmark’s automatic transfer Prime account, with bonus benefits applicable in store.

 Conclusion

The twenty actions outlined above are difficult, indeed, but these are extraordinary times, indeed. Present times call for new thinking, new leadership, and new applications of insights.

A true Customer First approach demands that Customers alone not bear the costs of disruption and change via higher shelf prices in all cases, not where inefficiencies exist in the ways we work, not where new forms of revenues are available from the gifts of shopper data, and not where Customer data science can show a better way.

dunnhumby is here to help.