Wednesday 3 July 2013

Opportunities in Deflation-Inflation Mix as Shops Slash Margins?

Ambient foods NAMs may be encouraged at ingredient cost increases finding their way to shelf-prices, resulting in average price increases of 2.5%, according to latest figures available from the British Retail Consortium and Nielsen.

At the same time, key non-food categories have experienced significant shelf-price deflation as retailers slashed prices in attempts to drive sales in falling markets.
As an indicator of severity, non-food deflation rates were as follows:
- clothes and shoes, 6.7% cheaper
- furniture and carpets, 2.4% cheaper
- TVs, DVD players, fridges, washing machines and ovens, 4.7% cheaper

However, as most mixed-goods retailers operate portfolio businesses, in that their overall interest, and that of the stockmarket is in overall profitability, then increased food sales can become a means of subsidising losses in non-foods…. 

In addition, having ‘allowed’ food price increases, the retailer may be tempted to seek financial support from suppliers that appear to be ‘more profitable’ as a result.

Whilst experienced NAMs will no doubt draw upon their repertoire of ways of saying ‘no’ to requests for non-specific subsidies (See How to say ‘No’), it may be more difficult to explain net profit margins of 7%+ in a supplier’s UK Annual report, compared with the retailer’s 3% or less in their P&L (See How to justify your bottom line).

However, imaginative NAMs will see real opportunities in promoting ambient food as a traffic builder to enhance shoppers’ access to non-food bargain offerings, and also use related food/non-food purchases as a means of driving the impact of retailers’ sales of more profitable foods to the bottom line, and claiming credit for the strategy….

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