What's Your Inflation Strategy?
Gone are the days when the pandemic was the hottest point of conversation. Today, convenience store leadership teams, much like their counterparts in other business sectors across the U.S., are focused on inflation. A buzzword no one wanted, inflation has pushed its way to the forefront as it reverberates through every aspect of running a business.
It’s a top issue in nearly every discussion among the leadership team at Parkland USA, said company President Doug Haugh. Detailed internal discussions around how to approach rising prices happen much more frequently now. “We have had to work hard to accelerate our reporting and expense tracking cycles so everyone from store managers to the price book team to our category team can track and adjust to rising prices more rapidly,” he said.
What used to be a monthly routine at Parkland USA has become a weekly one. And what the team used to do weekly, now is daily. “It’s intense, but otherwise the margin compression could be ruinous,” he said.
Inflation likewise garners much attention at Coen Markets. “We have weekly meetings on input cost changes and have to judge what/where/how to respond,” said Charlie McIlvaine, chairman and CEO of Coen Markets Inc. The 60-store chain operates in Pennsylvania, Ohio and West Virginia. “It’s a nonlinear process that takes vigilance,” he said.
Labor cost inflation garners a similar level of attention, as does recruiting itself, McIlvaine said. “This is our reality today and one where we cannot afford to avoid action.”
The sting of inflation extends to every operator, large and small. “We’re really feeling the pain right now,” said Babir Sultan, president of 12-store chain FavTrip in Independence, Missouri. He continues to get letters from seemingly every vendor regarding cost increases being passed along to him. From the CO2 company to the company that cleans and delivers carpets, the message is the same: Inflation is impacting his business.
It’s an excellent opportunity right now to really look at internal processes around vendor cost changes.
Sultan understands that companies have no choice but to pass costs along, much like, eventually, he in turn will pass those costs to customers. “Eventually it will make its way to the customer, and that means less margin going forward for us,” he said. “It’s really tough.”
In an effort to diminish the impact of inflation and the cost of products in the store, Sultan is actively looking at shifting gears where it makes sense. For example, to combat supply-demand issues he’s substituting local items wherever he can, and he’s considering private-label items where he can source them or if a supplier offers a related rebate to offset some of the pricing.
Supplier relationships are also being reevaluated, Sultan said. “It’s definitely time to revisit relationships with vendors,” he said. “We went through a list of vendors who we need to work with in the cold vault and some that we may exit our relationship if not meeting our needs and will reallocate elsewhere.”
In one case, a new vendor relationship brought about a sponsor for FavTrip’s social media, which has a strong following. “Out of those discussions, some good things can happen,” Sultan said.
WINNERS AND LOSERS
The reality of today’s business climate means that c-store operators large and small must take a closer look at every detail. Indeed, John Benson, director at advisory firm AlixPartners, believes those companies that lack discipline on how they manage their business will suffer as a separation of players tends to emerge in the kind of economic situation the U.S. is seeing today. Even larger, more sophisticated retailers have parts of their businesses where there is room for improvement, he noted.
Companies that lack discipline to manage their business will suffer as a separation of players tends to emerge in the kind of economic situation the U.S. is seeing today.
“Companies are going to have to respond; there will be winners and losers,” Benson said. It is a message he shared at the NACS State of the Industry Summit in April, a message he continues to preach, and one that he expects to reiterate throughout 2022, given no economist foresees a quick turnaround to the current inflationary environment.
What is important to understand, Benson said, is the impact of price increases on financials. “Oftentimes we see companies being price-takers or getting cost increases from suppliers and being reactive to those.” Instead, he advises trying to move away from the mindset of “there’s nothing we can do but pass it along or impact margins.”
One approach is to consider how often a price can be renegotiated. “It depends how important you are as a customer, how much leverage and relevance you have to that supplier,” Benson said. “While it’s easier if you are a larger company, there are always opportunities. It’s probably rarely the case that you are able to completely reverse it, but you can work with your supplier to mitigate part of that.”
Look at and identify points of leverage, Benson advised, for instance changing something operationally, such as a change in the order pattern to drive efficiency for the supplier, or if it’s possible, negotiate a better price with a longer contract. “Any consumer-facing business has to become much more intelligent in how they operate right now. It’s rare to see this many price increases this fast.”
It’s difficult to compare notes on how convenience stores handled inflation in the past and look for lessons learned, Benson said, since the last time the U.S. experienced inflation at this level was 40 years ago. “The convenience store industry is so different today than it was 40 years ago, which makes it difficult to look at historical precedent,” he said. “It’s a highly competitive environment for c-stores today. Companies don’t have the luxury of being passive.”
INCREASED COSTS: A PROCESS
When dealing with vendor pricing changes, establishing a good foundational process is always essential but becomes exponentially more critical to a business during inflationary periods, Liza Salaria, senior principal consultant at Impact 21, noted. “Make sure you have good processes internally around how you receive cost changes from the vendor community, and how those are reviewed and implemented into price book and the stores,” she said. “It’s an excellent opportunity right now to really look at internal processes around vendor cost changes.”
Now is the time to also look at overall buy practices, Salaria said, particularly in the foodservice area. “Determine if there is an opportunity to lock down pricing by taking a position on high-volume commodities. Additionally, research opportunities to buy direct (vs. redistributors) and consider launching RFPs on high-volume items to ensure you are receiving the most competitive prices.”
The challenge, even in the best of times, becomes keeping up with the number of cost changes coming from multiple sources, primarily direct-store-delivery suppliers and grocery wholesalers. Amid the current inflationary period, which includes hiccups in supply, operators may be finding they are underwater when it comes to receiving vendor price changes with ample time to review them and adjust retail pricing, Salaria said. Now is the time to verify that internal processes are working smoothly, and vender communication regarding price increases is well defined. “Many retailers do not have vendor policies set up effectively,” she said.
Readjust and figure out where it makes sense to price items and lower drive traffic, and then increase pricing on other items to keep everything in balance [margin-wise].
A good process starts with including vendor price changes in the contract, said Salaria, who advises operators to aim for a minimum seven-day notice. From there, category managers play a key role. “It’s very important with all price changes that a category manger sees that and makes the change effective at retail. As you set margin targets in price book, that allows the category manager to see when a cost has changed: It’s a trigger that they can make a move if they want to maintain margin rate.”
If there is not a policy in place where category managers are notified in enough time to execute retail changes, this could result in significant margin loss, Salaria explained. “This is a really good time to ensure that the linkage between vendor policy, price book, accounting and category management is solid.”
On a more macro level, Salaria advises managing the whole portfolio and avoiding the trap of getting into silos and managing by category. “It’s really about optimizing the whole portfolio of products in a way that drives value and incremental trips,” she said. “That isn’t done by category.”
Salaria shared that some categories might not be as price sensitive for customers and the retailer can look more closely at margins. “Understand how margins can shift throughout the store,” she said. “We find most category managers are rewarded or held accountable by the individual category vs. the total store performance. Now is the time to work as a team and shift that thinking.”
A PORTFOLIO-STYLE MINDSET
Anis Hadj-Taieb, CEO of retailer pricing firm DemandTec, agrees that c-store operators benefit from viewing their business with a portfolio-style mindset. He likens the approach to transferring stocks around to keep an investment portfolio balanced. “The idea is to readjust and figure out where it makes sense to price items lower and drive traffic, and then increase pricing on other items to keep everything in balance [margin-wise].”
Even prior to the inflation the U.S. is experiencing now, having the right pricing and being able to balance pricing against a business objective was a sustainable, healthy way to run a business, Hadj-Taieb said. “Sadly, the most commonly used pricing tool today is often Excel, and it’s impossible to run a business on that. People are realizing they need to do something. We are seeing a big pickup in discussions and demand.
Pricing systems used to be a club for the bigger players, but you no longer have to scale to be effective.
“Pricing systems used to be a club for the bigger players, but you no longer have to have scale to be effective,” Hadj-Taieb said. DemandTec recently launched an ondemand model of its pricing and analytics system that takes the workload off retailers to build the internal team to handle the system, and, he said, makes pricing systems more financially approachable for regional players. “It makes it easier for them to embark on their pricing journey,” he said.
The pricing discussion goes beyond items in the store and extends to the multiple channels today’s consumers tap for purchases, such as ordering through a c-store’s website, app or through a third-party delivery model. Understanding how to price correctly through each of those different channels is important, Hadj-Taieb said.
“There are so many things outside of a retailer’s control these days; you cannot do much about some of those things,” Hadj-Taieb said. “But if you do not fix your pricing, you are at some point going to drive over a cliff.”
If you missed our Hot Topic webinar, Data-Driven Strategies to Minimize the Impact of Inflation on C-stores, co-presented with NielsenIQ, you can watch it on-demand at www.convenience.org/education/webinars. Learn how short-term shifts and item price sensitivities have impacted the way consumers shop, the enduring effects on shopping patterns if inflationary pressures persist and the data-driven strategies that c-stores can apply today to maintain sales volumes in the face of price pressure and sustain shopper loyalty.