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In the Trenches: Pricing challenges during inflation

By
Ron Pelger

It’s amazing how production costs have become absurd. It costs about 1.75 cents to manufacture a penny, more than seven cents to make a nickel.

Inflation is running wild. Costs are rising. Grocers are feeling it and in turn consumers are feeling it — and they don’t like that.

I can imagine the weekly sales meetings; I’ve been there often enough. Everybody gets into the act on pricing, particularly district operating managers who always seem to have their eyes on produce.

A district manager who knows very little about produce will frequently challenge the price of lettuce, bananas, berries or other items. They always want lower produce prices. Operating managers are totally unaware of the costs involved to get those items through the system from the farms to the stores and still make a profit.

This is where the produce director has to stand his or her ground. After all, who knows more about the fresh produce markets in the company? It’s not the CEO, president, vice president or district managers — it’s the produce director and buyers.

Inflation is repeatedly mentioned in the media. The word is out and being heard by angry consumers. Shoppers are complaining about the higher prices and some individuals cannot afford to pay much more.

According to the Bureau of Labor Statistics, food is 4.6 percent more expensive over this past year. Inflation is expected to rise 5.4 percent and shows no signs of letting up. Gasoline prices have nearly doubled. Costs have risen along with wages and that alone is driving retail prices through the roof.

Farmers are feeling inflationary pains with fertilizer almost doubling in price and seed costs per acre rising fast. Some farmers say their production costs could rise three to four times more in 2022.

Foodservice distributors are experiencing tight supplies. On top of soaring costs, many retailers are seeing deliveries arrive with several key items scratched due to shortages, and the situation is amplifying daily.

Recently, I saw a customer slowly pushing her cart along the produce department with a puzzled look on her face. She picked up a head of lettuce, saw the much higher price, was shocked, and placed it back on the display. Another flustered customer asked a produce employee how the prices can be raised so much within days. He accused the store of ripping off customers.

Regardless of how high the costs may suddenly be increased on items, doubling retails overnight can be excessive. This triggers customer anger and provokes complaints.

Cost is the dominant component in pricing. Higher operating expenses place pressure on companies. Pricing is vital to the survival of a company. There are three choices: lower costs, raise retails or eat all the additional expenses.

This means retail prices will remain on the rise. When it comes to raising those prices, there are several areas to consider:

Retailer Opportunity — Sometimes inflationary periods are an opportunity to move off of a longtime fixed price that drains profit. For instance, bananas have been stuck on low prices for many years. If higher inflationary costs in banana production are passed down to retailers, it can be a reason to raise prices in the stores. An increase of a few cents may be understood by customers during a time when they expect it.

Customer Price Sensitivity — Grocery budgets are getting tighter with inflation. Before raising an items price, consider how much the sales will be affected by lowering the consumer’s buying power.

Customer Response — Obviously, raising retails will affect customers and initiate a negative reaction. If prices are increased aimlessly, chances are consumers will retaliate by purchasing less, passing on it or shopping elsewhere.

Price Value — Consider how customers will perceive your produce prices as affordable. Avoid focusing only on margin when setting your retails. Special weekly ad retails should send a message of a great bargain.

Competition Reaction — Price changes are always likely to be responded by competitors. If you raise or lower prices in general, how will the competition react to it? How much will it provoke them?

There are always winners and losers when it comes to pricing. Losers don’t have a plan and will raise prices irrationally. Winners do their homework and do it with much consumer consideration.

One thing is for certain: It’s perfectly alright to let the district managers criticize produce retails, but they should never be allowed to get involved with establishing them.

Ron Pelger is the owner of RonProCon, a produce industry advisory firm. He is also a produce industry merchandising director and a freelance writer. He can be contacted at 775-843-2394 or by e-mail at ronprocon@gmail.com.

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