In recent days, the Federal Government is finally acknowledging what many in the retail industry have been saying for more than 15 months: Inflation is real, it is significant, and it does not appear to be going away anytime soon. The day after he was nominated to lead the Federal Reserve for another term, Chairman Jerome Powell acknowledged that high inflation is a “severe threat” and that the United States is on an “unsustainable debt path” with the national debt “growing meaningfully faster than the economy.” On January 12, the Labor Department announced that the Consumer Price Index rose by 7% in 2021 — the steepest increase since 1982!
Even worse, the Labor Department said on January 13 that its Producer Price Index, which measures inflation at the wholesale level before it reaches consumers, surged 9.7% in December 2021 from the year-ago period. This marked the highest figure on-record since the government began trading the data in 2010. One major hardlines wholesaler had raised retail prices on over 42,000 items through June of 2021, and the pace has only accelerated from there. Prices of plumbing supply items have gone up an average of 23.5% in the last 12 months alone.
Wholesale price increases are being driven by sharp increases in the price of raw materials. For example, the price of steel recently topped $600 per ton with forecasts showing the price headed toward $750 per ton. The price of epoxy resins, which are used in many paints and coatings, have risen by 60% in recent months. And, after a decade of steady declines, the price of semiconductors has risen 8.2% in the past 12 months due to global shortages and capacity issues driven by the pandemic. These raw material price increases are being compounded by severe shortages and rising prices in transportation. The price of ocean containers recently topped $20,000, up from $1,500 just 18 months ago. Freight surcharges of 10-18% impacting trucking transportation is driven by fuel price increases and driver shortages.
AN INFLATED FUTURE
In addition to my role as a Mereo Principal, I have several decades of experience in retail, which has shown that consumer prices rarely go down unless impacted by technology change. For example, the price of a can of spray paint has gone from $4.99 to $6.99 in recent months — an increase of 40%. This price is unlikely to lower, or if it does, it will lower sluggishly over the course of three or more years. Contrast this with the prices of LED light bulbs, which have been declining steadily due to technology advances as well as government subsidies. This means price increases on most durable goods are likely here to stay for the foreseeable future.
Recent inflation, though, is not limited to just goods; it is also impacting services. US wages rose by 4.7% in 2021, with faster increases in parts of the country like Denver, Colorado, where the minimum wage rose to $15.87 on January 1, 2022, putting it among the top 10 cities in the country. Wage increases are impacting the prices of services in categories like accounting, software subscriptions and services, and even healthcare.
So, you ask, how should we respond as sellers? Well, we are already seeing goods manufacturers resort back to “shrinkflation,” which we really have not seen on a broad scale since the 1980s. For example, the CEO of Domino’s Pizza recently announced they are reducing the number of chicken wings per serving while holding the price constant. General Mills is shrinking the contents of cereal boxes but charging the same prices. Gain detergent is holding its prices steady by reducing its product by 11 ounces. Similarly, consumers will find less in their Crest 3D White toothpaste tubes, their Milky Way bars and their Aleve pain killer bottles.
Domino’s is also making some products available only through online ordering, saving the costs of labor in the ordering process. Retailers like Walmart and Sam’s Club are eliminating 70% of their cashiers and enabling consumers to shop and check-out using an app on their smartphones. Fast food restaurants like McDonald’s and Wendy’s are rapidly installing kiosks for ordering and checkout, thereby eliminating most of their front-end staff.
But sometimes, it is not possible to sell less product for the same price or reduce costs through automation to hold your prices constant. What should you do then? The answer is to truly understand why your product or service is differentiated from the competition and how it adds value for your customer, and then clearly articulate that differentiated value proposition to your customer. This approach reduces the importance of price as part of the buying experience — even when prices are increasing with inflation.
WIN WITH VALUE
The Mereo way: Customer value derives from how your product or service uniquely either decreases costs, decreases time-to-market, increases cash flow, increases revenues — or a combination of these. Mereo uses a Value Messaging Workshop to help clients prepare this compelling story that can be clearly articulated by your sellers. This approach has proven to be effective even in periods of high inflation like we are experiencing today.
Learn how Mereo Principals shared our value messaging framework to build sales tools that helped align and enable sellers at Castellan, as well as supported the organization in entering the business continuity and resilience SaaS marketplace as a clear leader.