Managing 4 Margins
What will your retail shelf price be
on July 1? October 1? The industry faces
a global realignment of our pricing
framework. Price increase execution
is the number one issue for 2022.
Our business faces unprecedented
pressure. Raw materials, international
freight, delivery (fuel), and labor have
skyrocketed. Manufacturers attempt
to protect margins by passing on cost-
justified price increases.
All industry partners must work together
in a pro-active, transparent process to
ensure that our mutual business is
protected. Manufacturers do not seek
to control pricing. The goal is to keep
the shelves full and help all participants
manage through the most challenging
period in recent history.
A new price model will impact sales if
the action places your brand in a higher
pricing tier relative to competition.
Normally, export brands aim to fall in
the premium to super-premium range
relative to locally produced products. For
example, a brand shipped from the USA
may retail at 30% higher everyday versus
a local competitor. Under a price increase
scenario, this gap may extend to 50%
or more if other brands do not pass
on a price increase, or a distributor
or retailer grabs too much margin
in the pricing realignment.
Manufacturer Margin – #1
Companies raise prices to recoup higher
costs and achieve their business goals.
The hope is that consumers will continue
to purchase the brand at a higher price,
with no decline in unit sales volume.
Is this a dream or reality?
Distributor Margin – #2
Distributors pay themselves, capturing
the difference between price paid from
the manufacturer and amount collected
from the retailer. With a price increase,
distributors supply themselves with
a raise. This year, distributors also
experienced severe inflation, particularly
with higher fuel costs. What is the
distributor margin before your price
increase versus afterwards?
Retailer Margin – #3
Retailers fiercely guard and track their
category profit margin. Most buyers will
not miss an opportunity to expand their
margins and income. To be fair, retailers
also face increased transportation, labor,
and e-commerce costs that must be
considered. As with distributors, a key
metric is retailer margin before and after
your price increase.
Trade Promotion Margin – #4
Promotional discounts are critical drivers
of incremental business. Some incentives
and “back margins” are case rated at a
percent of sales. Other activities require a
fixed price tag. For example, a chain-wide
display program costs $10,000 per week.
With a price increase, this may translate
to a lower percentage of sales.
Currency, Duties, VAT
In this period of global disruption,
there are other line items in your
pricing calculation that may experience
fluctuations, frequently in a negative
direction. These include currency
exchange rates, duties, and sales taxes.
All may impact your shelf price.
The export price model must incorporate
four potential margin rates before the
new shelf price is established. A risk
appears when one participant in the value
chain captures a higher margin than the
original equation. Everyone would love
to increase sales, but ultimately bills are
paid with cash, not margin percentages.
Inflation appears out of control at
this point. Prices only appear to go up.
A worthwhile discussion to conduct is
“what if” costs retreat? Are price rollbacks
possible? What are reasonable
expectations from all sides?
Online Price Monitoring
Today, overseas prices can be checked
instantly from your home office. This
appears possible by monitoring e-commerce
websites for leading retailers. This tactic is
more accurate and effective than waiting
for old fashioned monthly price reports
supplied by the distributor.
Managers are navigating through a crisis
and the stakes are high. All participants in
the value chain maintain a vested interest in
managing the “four margins” in a balanced
way. Fortunately, consumer goods remains
an essential industry that will survive and
thrive. Winners will act now to minimize
the impact and disruption of the global
retail pricing realignment.