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Tuesday, April 16, 2024

Walking the tightrope

Balancing cost while wowing consumers: can it be done, asks Julie Neal?

In a difficult economic climate for both consumers and business, food and drink producers face a delicate balancing act to keep costs down while maintaining quality for customers.

While economists predict that inflation will fall in 2024, industry research suggests that food prices will continue to rise, meaning businesses could potentially lose out as consumers continue to seek out the best value. With reports showing that consumers are choosing to buy more supermarket ‘own label’ brands for essentials, what can FMCG businesses do to stay competitive?

Retain trust with consumers

Some manufacturers have faced recent media criticism over ‘shrinkflation’ – where product sizes or quality are reduced but still sold at a higher price. This is a risky strategy, as consumers typically react negatively to shrinkflation, as it feels as if they are paying more for less, leading to a potential loss of trust and potential damage to the manufacturer’s brand.

Where businesses may previously have ‘got away’ with this strategy due to there being no requirement to announce the changes in UK law, the continuing cost-of-living crisis means that consumers are more interested in value per gram or millilitre than ever. Consumers are also more aware of how things used to be. For example, where a block of butter previously provided the right amount required for a recipe, now two blocks might be needed for the same purpose.

Manufacturers and businesses know that small changes can have a big impact on consumer trust and perceptions of their brand. When reviewing products and profitability, consumer experience and satisfaction must always be at the forefront of the decision-making process.

Consumer confidence – for luxury goods only?

While inflation has reduced slightly from its 30-year high last year, food price inflation seems to be falling slower than other areas. Consumers are responding by shopping around for value, relying on supermarket own labels in place of brands that previously held their loyalty.

This shift is happening more with food and drink products than it is with cosmetics or household cleaning products, where brands are still preferred. Consumers also tend to stick to preferred brands when it comes to ‘treats’ such as confectionary and chocolate, as well as any luxury goods. For example, it has been reported that Tesco and Marks and Spencer saw a lift in sales over the festive season, perhaps due to consumers being more willing to spend on ‘luxuries’ at this time of year.

Explore consumer trends

While consumer shopping habits are changing, brands can continue to innovate to retain market share, and even increase their customer base. This relies on understanding consumer motivations and drivers. Cost focus is likely the highest priority for consumers at the moment, but there is also growing interest in health and wellbeing. Plenty of customers are searching for healthier alternatives or waiting for familiar products to become healthier, which could mean there are opportunities for innovative manufacturers to increase market share.

A third core driver for consumer spending is sustainability. Consumers are more interested than ever before in choosing products that have a reduced carbon footprint – for example, those with biodegradable packaging and those made from locally-sourced ingredients. Research has shown that 55 per cent of consumers are often willing to pay a small premium for sustainable products, something that manufacturers should consider when making decisions about product lines, packaging and ingredients.

Tackling rising costs through innovation

To successfully tackle rising costs while retaining consumer loyalty, manufacturers should aim to get a closer understanding of what customers value as well as what drives cost within their business. By marrying these two sets of data together, opportunities may be revealed which give consumers what they want at the same time as introducing value-driving efficiencies for the manufacturer.

For example, manufacturers might believe that consumers appreciate a certain packaging design or material, but when research is conducted, this might not be the case. This provides an opportunity to reduce costs without impacting the shelf appeal of the product and crucially, the quality and quantity of the food or drink inside remains unaffected.

However, it is important that all packaging decisions are examined through the lens of sustainability, as cheaper packaging may be harmful to the environment and put consumers off from purchasing a product. For those businesses that choose to take a sustainable approach to packaging, it is important to remember that sustainable products don’t have to be more expensive. To achieve the best result, businesses should model different scenarios with different materials to fully understand the current cost of packaging versus future costs, taking account of any impact the change might have operationally.

Manufacturers could also look at their supply chains to make efficiencies and optimise processes. For example, by examining consumer demand, manufacturers can optimise the product quantities produced by increasing batch sizes or make changes to the production schedule to reduce machine downtime. By using effective demand planning to balance stock holding against production, and thinking strategically about quantities to ensure the best price, businesses can optimise their cost base.

Increasing shelf appeal with data

Conducting a portfolio review is a good way for manufacturers to understand their product ranges and profitability through data, including the true cost of each SKU, for example, different sizes or language versions. Portfolio reviews can also help to flag unprofitable items as well as identify gaps in distribution, where new markets for the product might be found.

Data can also be used to analyse the purchasing patterns of consumers and assess the return on investment of discounting or promotional activity. This data-based information can help to drive sales and optimise profitability. For example, it might be found that consumers typically purchase three linked items at the same time. A good promotional offer that ‘bundles’ these items together may therefore deliver greater value than a ‘20% off’ sale.

Through a deep understanding of their cost base along with consumer buying patterns, manufacturers will be able to make better decisions, faster. As data maturity within the business grows, it will be simpler for the business to learn from the past and make plans for the future.

Consumer confidence is the key to brand loyalty

In a time of increased financial awareness, consumers are seeking out value for money. By providing an exceptional customer experience, engaging with consumers to understand what drives purchasing decisions and identifying value-driving levers, which don’t impact the quality or size of the product, manufacturers can maintain and even build brand loyalty.

Cost consciousness seems to be here to stay, and businesses should factor this into their strategies. It is not enough to monitor and analyse the data that they have, they now need to add to it too. By investing in strategies designed to build data maturity and taking the right decisions, manufacturers will succeed in optimising value and retaining, or even enhancing, customer loyalty.

Julie Neal is a director at management consultancy, Vendigital  

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