Operating in times of high inflation - advice from a seasoned professional
TWC Director of Communications, Sarah Coleman, spoke to TWC Chairman Mike McGee to discuss the highly topical issue of how wholesalers can survive stagflation – persistent high inflation, slowing economic growth and high unemployment. In this discussion, Mike shares his learned experience of working through high inflation in the past.
SC: It feels like we are living in unprecedented times - are there any lessons from the past that can guide those operating in the wholesale channel?
MM: There have been plenty of times in the past when the international economic situation has impacted the whole supply chain – but certainly not for a while. ‘Stagflation’ was last seen in the 1970’s when the oil crisis occurred at a time of high inflation. I can remember that at that time there were examples of retailers operating in underprivileged areas selling Oxo cubes singly, as customers really struggled to manage their basket spend. Unfortunately, this reminds us of how stark the current situation could get for those who are already living hand-to-mouth.
Inflationary buying and selling is a bit of a lost art after this long period of relative stability - there are likely to be regular price increases on many lines, so a clear understanding of what stock has been bought at what cost price is imperative. There will need to be a forensic view of the margin/stock/volume relationship and the impact that pricing decisions on key lines and sub-categories has on the business. Of course, many of today’s senior leaders wouldn’t have been in the workforce when we last experienced stagflation (or were very early in their careers) – so those businesses that do have team members who have traded through inflation in the past will have a huge advantage.
There is more administration and more effective data management needed in this situation. The breadth of categories a buyer has responsibility for within wholesale purchasing makes it difficult to micro-manage on this scale. Good data and reports help but inevitably it is not possible to exert the level of control that is needed – so operators must concentrate on key lines and key sub-categories, dealing with the rest when time permits. That’s obvious, but not always the case in the real world when a customer is complaining about the price of cranberry sauce!
SC: Don't convenience stores typically do well in times of recession?
MM: In my view, this is something of a cliché. It may have been true in the past, but the hard discounters didn't exist in those days. As consumers face real pressure, they will be very choiceful about where they spend and where they get best value. There is an acknowledged premium when shopping at convenience stores which will be a barrier unless retailers help, with a clear focus on value.
We can expect the discounters – and the major multiples – to try and ease the consumer impact on prices to maintain their market share position. They will do this by forcing back increases and driving out cost by enhancing efficiency even further.
SC: In your view, what is the most important tool in a wholesaler's armoury during high inflation?
MM: Having a stock buffer is critical - it is possible that prices will go up weekly (particularly on wheat-based products) - the most powerful mitigation is holding onto stock so that you can choose whether to increase the price in line with the market or hold at the lower price because you bought it when it was cheaper. The stock buffer also works because wholesalers will clamour to buy before the price goes up, so you will have first mover advantage if you already have stock on hand.
Operators should also have a clear strategy on margin mix by sub-category. It may well be, for example, that a reduced margin could be taken on a key area such as standard lagers – allowing volume to maintain the cash return (although this needs very careful monitoring otherwise it can get out of hand), whilst premium lagers are increased in line with supplier costs.
Value will become even more important on the key lines, but tertiary lines can serve the cause as well. Brand loyalty is eroded in tough times although strangely brand recognition tends to hold up surprisingly well. That means that switching brands within sub-categories to enable consumers to trade down needs to come to the fore. For example, within Lager, reduce the count or stock levels on premium brands and increase the visibility on branded standard lager. This change in brand mix could create a lot of admin but nimbleness often marks out the successful in challenging times.
SC: What will operators have to do differently to work through these challenges?
MM: There is potential for a bit of change in the way things are purchased – there could be an opportunity to buy parcels of stock – deals will still be available and because value is key, retailers will be looking for goods (staples) that offer their customers more value AND drive footfall. Ranges will probably shrink (we have already seen this from suppliers when we have had supply issues before), this does not necessarily mean things have to be replaced. A more focused measure of return on space in times of hardening margins is always worthwhile.
As I said before, there is a great deal of admin and data analysis needed. Operators will be buying the same SKU at different prices and to survive they will need to track each case – what price it was bought at and the selling price, so there is absolute clarity on margin by day. Most have never had to do that before – some operators are better at margin management than others and, equally, some operators will have the benefit of having senior team members who have traded through inflation in the past - experience, great systems and actuary level numeracy are key!
SC: What are the key considerations for a supplier?
MM: Prices are increasing for all the reasons we know – rising energy costs, higher labour costs, limited supply of key ingredients driving up prices…. Consequently, every part of the supply chain will have to make decisions regarding how much price increases are passed on to manage margins and control costs.
Suppliers will of course have some different considerations. This will include product reformulations as well as key profitability decisions. With many suppliers being venture-capitalist owned or listed, they will inevitably need to maintain margins. In contrast, much of retail wholesale is privately owned and therefore has the option of taking a more long-term, strategic view, which means that wholesalers do have the option to flex margin if they choose.
Whilst suppliers and wholesalers will be seeking to maintain margin as much as possible, this is an ideal time to consider overall range and whether there is an opportunity to increase efficiency – any option to genuinely reduce costs to maintain overall margin should be on the table and given serious consideration by both parties.
SC: Do PMP's still have a role to play?
MM: The quest for value and the acknowledged convenience price differential means that from a consumer perspective, PMPs are more important than ever to provide reassurance on price. However, anticipated price volatility raises the question of how sustainable price marked packs are. Suppliers won’t be able to keep re-printing packaging, but a fixed selling price does have the benefit that margins are clear too.
SC: Any final words/parting advice?
MM: Stagflation is tough and requires a different approach, so it makes sense to tap into anyone who can share their experience of trading through it. Stock is king as it gives you options, but beyond that, you need to take a forensic approach to data analysis. Like all challenges, there will be winners and losers depending on how well each wholesaler adapts and adjusts to this new reality.