Tackling the New Paradigm: Rapidly Evolving Prices During Inflation & Deflation Cycles

Feb. 20, 2024
By Fabien Mawas, Co-Founder, ULiT 

Here’s a recent news item: The Food-At-Home CPI (Consumer Price Index) decreased by 0.1 % from Nov. 2023 to Dec. 2023, but rose 1.3% year-over-year from Dec. 2022. Overall, the CPI increased by a whopping 11.4% in 2022.

This is a good transition to today’s topic: What’s the real impact of rapid shift during inflation and deflation cycles on a category — and what does it mean for retailers and CPGs?

Normally during inflation, the prices of consumer goods generally rise. It impacts the purchasing power of consumers, reducing their ability to buy the same quantity of goods with the same amount of money.

During the deflation cycle, prices tend to fall. While this might seem beneficial for consumers, this can lead to reduced spending, as consumers delay purchase in anticipation of lower prices ahead.

More than the price, this impacts the mixed products on the shelf. Retailers and suppliers should consider new pricing strategy, customer behavior, and product innovation, and give key focus to private labels and generic products.

In this new paradigm, instability is taking root for the long term and beginning to appear as a system issue:

  • In the case of deflation, the corresponding impact is not fully represented in profit and loss statements. While certain ingredient costs may decrease, other lines in the P&L continue to fluctuate, contributing to a complex and unstable financial landscape.
  • In these scenarios, the strategy of category leaders involves taking divergent paths, marked by implementation of complex deal metrics which further pushes the return to normalcy out. Long term partnerships are broken, resulting in heightened stress and pervasive sense of distrust.
  • The retailers’ strategy involves transitioning towards a low-cost scenario where they have substantial control over the value chain.

Eliminating Silos Is Crucial

In this context, mastering metrics and breaking down silos within company during trade term negotiations becomes strategic.

A clear Joint Business Plan (JBP) should be created and become center of negotiation. Teams should have real-time visibility per customer at all category levels (category, sub-category, SKU level) with the possibility to do different scenarios to optimize the margins.

In addition to eliminating silos, cross-collaboration between finance, category managers, sales department, production department, R&D, should be fluent sharing same objectives. Those departments should come together and work off single source of data — thereby creating a single source of truth.

Your Data & Systems Are Key

When it comes to consolidating all data in one location (correct and clean) and ensuring smooth operation of all processes, IT systems typically become the limitation. Users are compelled to adapt their operations to their existing IT solutions (Excel, in-house solutions, multiple apps, etc.) and to use BI solutions to track operational Key Performance Indicators (KPIs), which are costly and labor-intensive.

To succeed, a novel IT solution that addresses modern challenges must be implemented. Existing solutions were not designed to address the new paradigm of inflation/deflation.

The Need to Measure

Organizations may possess vast amount of data and top-tier systems in a category. However, if they fail to measure the appropriate metrics promptly, it becomes irrelevant. KPIs must align with business and market objectives, ensuring clarity and simplicity in comprehension. There should be no ambiguity regarding whether goals have been met or not.

Based on our experience, here are examples of important daily operational KPIs:

Category Managers:

  • The performance of the category at product level by each customer/channel.
  • Exact P&L by SKU considering all additional costs and the raw material cost fluctuation.
  • Competitor positioning (prices, store presence, Innovation, etc.).
  • Study deeply / track new consumer behavior to calculate the impact of launching innovation.

Key Account Managers:

  • The exact margins of its products (taking into account trade funds and all other hidden funds).
  • Follow, in real-time, forecasted revenue vs. YTD revenue.

Tying It All Together

Rapidly fluctuating costs present a significant challenge for all businesses. However, those poised to thrive are those equipped with strong foundational values and systems.

Based on our experience working with customers across the U.S. and Europe, we’ve identified three key challenges that winners have tackled well:

  1. Many companies rely on Excel for category management, a useful tool but one that encounters limitations when comparing diverse datasets across different periods and ensuring data accuracy. Each company typically has an Excel specialist; however, their absence can impede file management or modification.
  2. Obtaining accurate information is often challenging due to scattered data across various platforms with no interlinking. Data duplication and inconsistencies arise from manual entry, leading to human errors.
  3. Internal and external communication predominantly rely on email, posing risks, especially when employees depart, resulting in lost information. Implementing a dedicated digital workflow platform aligned with the company’s business processes ensures seamless information exchange, preserving continuity even with staff turnover. New users can grasp the historical context and sustain operations without disruption.

Conclusion

In the age of inflation/deflation, traditional IT systems reveal their limitations. Continuing with the status quo is no longer viable. It’s imperative to consolidate data into one place (single source of truth), dismantle silos by fostering interdepartmental connectivity, establish well-defined business processes with clear workflows, and ensure easy accessibility to KPI dashboards.

Companies must strive to minimize administrative burdens and data duplication by a minimum of 80%. Furthermore, future-proofing requires new tools that seamlessly integrate with the forthcoming AI, streamlining business operations for enhanced efficiency and adaptability.