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October 2024

Inflation: It’s all in the words

by  Scott Chepow

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Inflation: It’s all in the words

October 2024 by  Scott Chepow

Back to insights

 

Inflation's grip continues to challenge consumer goods manufacturers. Companies face rising costs and shifting consumer demand, forcing them to balance creating value for retailers while driving sales, particularly among budget-conscious shoppers. Navigating this complex landscape requires effective negotiation strategies across the entire value chain.

“Inflation is like toothpaste. Once it’s out, you can hardly get it back in again. So the best thing is not to squeeze too hard on the tube.” Dr. Karl Otto Pöhl. 

Inflation is stubborn across the globe, and at the same time while price increases are still very much a reality, the rate at which they are increasing is slowing down. The wording here is important: slowing down does not mean they are stopping, and it certainly doesn't mean they are decreasing.

What it does mean is conceptually simple. Prices are continuing to rise, but at the slowest rate since the onset of the pandemic in 2020, and at a rate that is comparable to slightly higher than the historical 2 - 3% - with acknowledgement to those in countries in the G20 that have historically seen exponential growth in inflation, since 2 - 4% is the global norm.

If you are a manufacturer of fast moving consumer goods anywhere in the world, this slowing of inflation presents challenges that manifest in a couple of different ways.

First, despite what consumers are reading and hearing, raw material input pricing is still largely on the rise. While some commodity inputs are decreasing in cost price, most are not. Unemployment remains low, translating to continued high labor costs and on-shelf pricing, and these costs are carried through the value chain to the end consumer. This challenge is represented by a potential change in consumer demand.

Second, in the US, real wage growth is finally exceeding inflation and consumer confidence had a slight uptick in May after a period of decline. However, expectations of consumer confidence are still not in the, “Wow, this is the most amazing time in history!’ range. Combining the lag in real wage growth with declines in consumer confidence provides a recipe for challenged demand.

An article released by The Wall Street Journal cited a disparity in US consumer spending, with lower income earners spending less and higher earners continuing with their normal spending patterns. If your business is targeting the high-end consumer, it is possible you are not seeing a significant impact. But if your target market is the lower income bracket, it’s likely you are seeing a more drastic impact on demand.

As a manufacturer of fast-moving consumer goods, you must think about how you deploy the scarce resources you have to increase demand while still creating incremental value at the retail level, all in keeping with the bifurcation of consumer spending rates noted above. In a world where inflationary pressures persist, this is no easy feat. Creating incremental value while increasing demand requires evaluating your value chain for efficiencies to understand where you can focus on negotiating for incremental value for your business, while simultaneously looking at ways to create additional demand within the constraints of your price elasticities. This calls for effective negotiation techniques and the application of negotiation strategies tailored to commercial environments.

When considering the profile of the stretched consumer, it is important to think about the market positioning of your offerings in terms of price. Are there opportunities to generate more value in procurement and sourcing, supply chain to sales, or demand creation shopper marketing, so you don’t break the bank for the stretched consumer?

I have had the opportunity to work with a client that has established a negotiation board to support their sales organization. On that board sit representatives from marketing, procurement and supply chain. The conversations are centred around maximizing value across the chain, with each party weighing in on how they can contribute to increasing both the margin and the value to the consumer. It’s a fascinating process designed to increase shareholder value and consumer demand through commercial negotiation insights and cross-functional negotiation practices.

When assessing the value chain for opportunity, consider your supplier segmentation that feeds the market position of the impacted products and where it is applicable for both parties to create value, versus your company to extract value. Similarly, consider your customer segmentation and where it makes sense for both parties to create value versus extract value.

Sounds easy, right? This is what synergistic functional alignment looks like. The challenge, despite what most companies think, is that such alignment doesn’t always exist, nor is it always sufficiently aligned to execute negotiation effectively across the value chain.

When executive leadership talk to me, they often speak of the synergistic workings of their organization’s internal mechanisms, from sourcing all the way through to the consumer. This horizontal integration needs to exist to maximize the potential of the value of the business. This is where strategic leadership is often viewed as lacking. Organizational negotiation capability development can offer the tools and insight needed to successfully manage inflationary pressures across your organization.

For those who are able to view the transformation points internally and externally, great. But if you need a hand doing so, get in touch.

About the author

Scott Chepow is a partner at The Gap Partnership, where he leads the design and implementation of negotiation solutions for Fortune 500 companies.

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Scott Chepow