With supply chain difficulties, labour shortages, and a lack of raw materials, there has been only one direction for prices over the last quarter of this year: up.
In October, the UN Food and Agriculture Organisation recorded global food prices at a 10-year high, as the cost of ingredients like cereals and oils increased due to crops perishing over the pandemic.
More recently, the British Retail Consortium (BRC) reported an annual increase in shop prices of 0.3% in November, well above the 12 and six month average price decreases of 1.2% and 0.6%, respectively. It was the first time prices had risen since May 2019.
Food inflation accelerated to 1.1% in November, up from 0.5% in October, the highest inflation rate since November 2020.
“The impact of labour shortages, rising commodity prices and transportation costs have now very clearly taken their hold on consumer prices,” said BRC CEO Helen Dickinson.
Brands including PepsiCo, Unilever, P&G and Kraft Heinz have all warned of price increases at the start of 2022. Kraft Heinz CEO Miguel Patricio told the BBC consumers will have to get used to higher food prices in future, as the world’s population continues to rise, while the amount of land to grow food on does not. Not all cost increases should be passed on to consumers, he added, but some will have to be.
But while Unilever and P&G have both admitted they will have to raise their product prices as they are squeezed by increasing commodity costs, both FMCG giants have promised to maintain their current marketing investment. “This is the time to step forward, not back,” P&G’s CEO Jon Moeller said.
Coca-Cola’s CEO James Quincey, meanwhile, has said the company’s brands need to “earn the right to adjust their prices”.
“We approach it from the point of view that our brands need to earn the right to adjust their prices each year, whether that be because of the marketing, innovation, execution on investment, or even pressure on labour,” he said. However, the company also intends to increase consumer-facing marketing spend.
Meanwhile, according to AJ Bell financial analyst Danni Hewson, price will be the major concern next year for retailers. “It’s going to be trying to find the goods that people are prepared to buy at the price they are prepared to buy it,” she says.
Margins will be tight, so discounting in the run up to and wind-down from Christmas will be difficult. With consumers likely to be more price conscious in the aftermath of Christmas, particularly amid rising energy costs and the possibility of interest rates going up, the absence of this cushioning may mean falling sales.
In fact, Hewson anticipates a drop in retail spend over the next quarter. “I think retailers know they’re going to have a difficult start to the year,” she says.
With all this in mind, price is going to feature firmly on the marketing agenda next year. Marketers will need to prepare to justify higher prices to customers, and work to ensure that the price remains one that customers are willing to pay.
As PZ Cussons chief marketing transformation officer Andrew Geoghegan wrote in Marketing Week last month, pricing tends to be marketers’ least favourite of the 4Ps. But, “price is probably the most powerful lever a marketer has in enabling potential consumers to understand their proposition and convert that into sales”.