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Inflation impacts natural retailer buying, merchandising strategies

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Inflation impacts natural and organic categories less, but labor and supply chain issues complicate matters.

The natural grocery channel is feeling the impact of the price inflation that is driving up costs throughout the economy, forcing many retailers to alter their merchandising and procurement strategies.

These pricing pressures come as many retailers are also struggling with a tight labor market and supply chain issues, both of which are contributing to the pricing pressures and complicating retailers’ overall operations.

“Ingredient or material shortages along with freight, labor and production cost increases are all factors driving the inflation across the nation, including in the natural and organic space,” said Jeremy Adams, director of category management at KeHE Distributors.

Data from the IRI CPG Inflation Tracker showed overall grocery inflation of 7%, year over year, as of Oct. 17, with the highest increases in meat and seafood. Certain general merchandise categories were also up. A recent survey of USDA data by Magnify Money showed, however, that prices of conventional grocery items were rising faster than their organic counterparts, which already carry premium price points.

Adams noted that natural and specialty products tend to be less sensitive to price changes because of their dedicated consumer base.

That hasn’t necessarily made life any easier for natural retailers, however. Cheryl Hughes, owner of The Whole Wheatery in Lancaster, California, said inflation is forcing the retailer to pay more attention to buying opportunities.

“We have tried to really buy well and pass those savings along,” she said, adding that being a member of the Independent Natural Food Retailers Association has helped with pricing strategies.

Produce items appear to be the most impacted by inflation, as a result of weather and increased demand, but grocery staples have also been a challenge because of limited availability, according to Hughes.

“You have to pounce when you see them offered, and buy a bit deeper,” she said.

Sarah Barron, growth solutions manager at KeHE, said some regional and larger chains are stockpiling certain products long before they are needed on store shelves.

“Pre-inflation and pre-pandemic, this type of buy-and-hold volume strategy would have been common for the club sector or for chains to secure special deals,” she said. “However, the products are being purchased at an extreme premium and months prior to seeing any store shelves.”

Traditionally retailers seek to employ a “dock-to-stock” strategy that keeps inventories lean and controls costs. Now, however, some retailers are investing in more storage capacity specifically to store more product, Barron said.

“This is significant capital on the retailer side, but likely will see a ‘slow burn’ of fluctuating inventory at the store level without having to greatly increase the price,” she said.

Rethinking assortments

Some retailers are rethinking their assortments in an effort to manage prices for their customers, Barron said. For example, some are opting for less product variety with more facings, and are open to more frequent changes of their sets.

“The age of panic-buying taught us all that we can settle for another brand of almond butter for a few weeks if our usual go-to is long-term out of stock,” Barron said. “Schematics are more of a suggestion now, and to be applied loosely when revolving door replacements are the new name of the game.”

Retailers are also looking at more value brands and private labels that come with a lower price point and reduced margins compared with premium brands, but drive higher volumes, she said, and cutting back on certain promotional activity, such as buy-one, get-one-free and temporary price reductions.

“Retailers continue to have to make the hard decision if it’s in their best financial interest to offer a product on discount to the consumer, or to keep level all-year round pricing. Expect more weekly deals than monthly.”

Matthew Pavich, senior director of innovation at Revionics, an Aptos Company, which offers pricing optimization solutions, said retailers should be strategic about which products to price higher as their costs increase, and which products to hold back on price increases. Certain products may be key items for customers of particular retailers, for example, or a retailer may want to gain a competitive advantage on certain items.

“At a time when the whole market is going up … people are on tighter budgets, and it’s important not to take massive price increases, but have a balance,” he said.

Barron agreed that raising prices across the store is not sustainable.

“Customer loyalty is more important than ever,” she said. “Therefore, some inflation will have to be absorbed at a loss to the retailer”

Retailers that act predictively, stocking up on inventory, for example, rather than reactively, “will have a leg up in the volatile pricing game,” Barron said.

Inflation outlook cloudy

Barron said she was hopeful that the economic climate would stabilize eventually, although inflation will be with the industry for a while.

“Winter is coming for grocery inflation, but the sun will prevail in the longer term,” she said.

Hughes of The Whole Wheatery was less optimistic.

“Inflation is here for the long haul,” she said. “It will and has increased as folks come off unemployment.

“I actually see the bigger problem is going to remain access to product,” she added. “There are so many supply chain disruptions, it is hard to fathom how this clears up any time soon.”

Hughes said she expects that consumers will focus on meeting their basic needs and will cut back on nonessential items such as beer and wine.

“Folks have to eat, and their spending will give way to more center aisle purchasing and produce—less to ‘extras,’” she said.

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