(Expansion) – The economic environment facing the consumer is challenging, perhaps the most challenging in recent years. There are many factors behind the rise in prices; however, to understand the pressure we are experiencing today as consumers, it is enough to summarize that the annual rate of inflation reached 8.16% in the first half of July.
In its non-core component, the indicator shows double-digit increases in fruits, vegetables and agricultural products, while energy continues with low single-digit increases due to government support and policies; in its subjacent component (the so-called basic or base inflation), the increases are 7.56%. For this reason, consumers are looking for ways to make their money work like never before.
This environment is not short-term, and proof of this is that, in the future, it is estimated that brands will continue applying price increases to deal with cost increases, trying to maintain healthy margins.
In Mexico there is a long tradition of summer promotions driven by self-service that each year promises to generate real savings in households through their promotions, the most famous being the 3×2.
With prices on the rise, the summer promotional strategies developed by retailers and manufacturers do help the shopper to get better returns for each peso invested in discounted products. This in turn drives spending and short-term consumption in the channels that participate in these summer initiatives.
Derived from the above, one of the main effects of this promotional season is to bring traffic from other channels, such as the traditional one, to large-format stores such as self-service stores, who usually execute and communicate this initiative mostly.
The result of the summer promotional season, although positive, usually varies due to the type of activity (such as direct discounts, combo or multiple strategies, and the very famous 3×2), the depth and validity of the discounts, and the categories involved and their price dynamics.
For example, today we find that there are two large groups of categories and products in terms of their price dynamics in the year: a group that has increased prices below official annual inflation, and another group that has increased prices above of said inflation; in some cases with high double digit increases.
The general result is that the product categories that increased prices below inflation managed to maintain their average purchase volumes per household, while the product categories that increased prices above inflation reduced their average purchase units.
As a consequence, the demand for large and extra-large packages has become relevant to mitigate the rise in prices through a better cost per liter or kilo when buying larger volumes. It is in these last categories where own and mainstream brands develop, while premium ones contract their importance in household spending.
Considering the above, in order to know if there is a real saving for the shopper by activating higher purchase volumes at lower prices thanks to the summer promotional season, we need to understand the speed of consumption of these product categories.
When analyzing the purchase behavior of “stocking”, we find that there are categories that, by increasing purchase volumes, also accelerate their consumption rotation, which generates marginal savings in real terms. There are others that, not because they are bought to a great extent, generate greater consumption. It is the latter that do end up creating significant savings at home.
Beyond the summer promotional season…
It is important to underline that we are in an atypical environment. The consumer in Mexico is not used to these levels of inflation, nor are the brands, so it is time to adjust the business plans and recalculate.
Here are three pricing insights for brand success in today’s environment:
1. Do not be afraid of price increases . They are not necessarily bad. While it is true that poorly managed can painfully impact the demand for certain products and categories, well managed can allow profitable business development. (However, it is very important to understand the impact that stock purchases have on some categories and the damage that over-promotion can trigger on your purchase frequency and product value.)
2. Do not execute “mark-up ” strategies. Basing price increases on cost increases is prohibited. Rather, price adjustments should be made based on the product’s value proposition and portfolio strategy.
It is necessary to consider the elasticities of the products and the purchase habits of the shopper by purchase channel.
3. Don’t cut marketing expenses . Although it’s a way to generate short-term savings, cutting marketing costs is like deliberately running a car out of gas. The above is not the answer; redistributing expenses efficiently is.
The recommendation is: invest in digital and the development of e-commerce, as well as in efficient and profitable promotions and executions at the point of sale, and invest in the brand.
Editor’s note: Juan Carlos Jouve is Director of Customer Service for the Worldpanel Division of Kantar Mexico. Follow him on . The opinions published in this column belong exclusively to the author.
