The past year has not been easy for convenience retailers as CPG inflation has negatively impacted in-store margins, and there’s no clear end in sight. While there are multiple articles discussing that sales revenue has increased year over year, the real impacts of this inflation can be seen in shrinking margins.
Bill Ivers, CEO at Taiga, an analytics company serving c-stores, saw the impact of inflation on CPG product margins beginning in early 2022. That’s when convenience retailers increased pricing to maintain margins amid rising costs. However, the price increases resulted in changes in consumer behavior patterns that ultimately yielded smaller margins and were evident by Q3 2022.
Inflation and CPG Margins
The driving factor for these changes in behavior was inflation. Over the five consecutive quarters ending in March 2023, CPG prices rose by a total of 22%, as retailers raised prices to maintain their margins. At that point consumer behavior began changing rapidly. The month of March was the tipping point where inflation peaked and a combination of other economic events, like the failure of Silicon Valley Bank, contributed to undermining consumer confidence to the point that NIQ described consumers as exhibiting “recessionary behavior.
“My research revealed that most convenience retailers were not keeping up with the rapid pace of inflation. I began to see CPG margin compression all over the place,” Ivers said. “The impacts of this continued from early 2022 all the way through the first quarter of 2023. In March of 2023, we began to see a crisis in consumer confidence, which led to a major change in purchasing behaviors. For example, consumers began to prioritize perceived value, buying on promotions and substituting private labels for name brands.”
While inflation rates may be slowing, we are not out of the woods yet. The aftershocks of this inflation-cased behavior are far reaching. Ivers says that once consumer behaviors have been altered, they don’t necessarily revert back. Some of the changes in consumer behavior that happened during the pandemic are still in place. Convenience retailers need to adapt for these changes and adjust promotion and merchandising strategies accordingly.
Increasing Consumer Value
“Customers are seeking perceived value with their purchasing power,” said Ivers. “Promotion strategy right now is extremely important.” Loyalty often goes hand in hand with promotions, and customers are wide open to joining loyalty programs if they feel they can receive special offers, he added. “It is good timing to grow your loyalty channel. Customers are more receptive to loyalty programs than they were just a year ago.”
Because customers are seeking value, they are buying more private label items. “We are seeing some consumers moving away from premium products and choosing products that they perceive as a better value,” Ivers said.
It’s one thing to understand what’s happening with consumer-buying behavior, but it’s another to implement strategies to address this in your business. This is where Taiga comes in. Taiga’s cloud-based platform, processes and expertise help retailers become more data-driven and take quick action on that data.
“It all starts with having the data. That’s the foundation for an effective strategy against inflation—and being able to accommodate the evolving customer,” Ivers said.
This article is was originally posted on the NACS website in September 2023.
