Three Ways To Manage Consumer Price Inflation

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Earlier today, I had a very revealing conversation with David Donnan, a Partner at A.T. Kearney who focuses on the consumer products and retail industries. The big question on both our minds: how will food and clothing manufacturers and retailers try to manage commodity price inflation – and how will consumers react?

Donnan's prognosis is straightforward: like most economists, he expects a 3-5% increase in prices for grocery store products. Most of this rise is likely to take place in the second half of the year, as contracts signed at higher prices after November 2010 start coming due this spring and summer. By summer and fall, these price increases will be be seen in the marketplace.

Donnan concedes that "oil and food commodities prices rising at the same time amounts to a double whammy for consumers." That said, he believes the impact in developed markets will be limited. Food makes up only about 7% of the budget of the typical US household – a significantly smaller chunk than gasoline. What's more, consumers buy gasoline as a commodity, so they are much more conscious of, and sensitive to, high prices. They buy food as finished products, so changes in price are less noticeable to them.

The key factor in Donnan's view: "There are multiple levers that manufacturers and retailers can pull to manage higher commodities prices." Here are a few:

1. Restaurants can push value meals and cut back on promoting commodities-intensive super-size offerings.
2. Manufacturers can make packages smaller rather than raise the price. People are less sensitive to changes in package size than to prices. As Donnan puts it: "A 56 oz container of orange juice looks virtually indistinguishable from a 59 oz container, but of course it contains less juice. A Häagen Dazs and a Ben & Jerry's pint look like they're the same size on the shelf, but in fact they're not."
3. Retailers can push their private label brands. Wegmans and Costco have already committed to keep prices on their own-label products stable. This tactic doesn't only benefit their private label business, but also disincentivizes brand manufacturers from raising prices too much.

Donnan expects commodities prices to remain high for the foreseeable future: "In 2008, sugar, soy and other commodities peaked until the recession hit. This time around, we have elevated demand also from emerging markets. So unless the economy dips back into recession, we're not going to see a commodities price decline like in 2008-2009."

Thanks to Marc E. Babej / Blogs Forbes