Combat Climbing Costs

Experts from the store brand supplier community offer advice to retailers for dealing with rising commodity costs and other pricing pressures.

A new year has begun, and the pressures of rising commodity costs continue to affect manufacturers, retailers and — ultimately — consumers. Progressive Grocer's Store Brands asked four store brand-supplier experts — Howard Brandeisky, vice president, global marketing, innovation and customer solutions with John B. Sanfilippo & Son, Elgin, Ill.; Mark Coleman, vice president, retail division with Catania-Spagna Corp., Ayer, Mass.; Chris Ferdock, vice president of marketing with Associated Hygienic Products, Duluth, Ga.; and Dan Kelly, vice president of sales with Musco Family Olive Co., Tracy, Calif. — for some tips and strategies to help retailers here.

PG's Store Brands: How are rising commodity prices affecting the national brands?

Howard Brandeisky: The nut industry has experienced unprecedented commodity increases over the last year, with almost every nut type seeing significantly higher prices. The commodity cost pressure is due to a variety of factors — ranging from increased international demand to poor harvests driven by unfavorable weather conditions. Of course, in this environment, we have seen retail prices go up for both national brands and private brands. We have seen national brands react in a

variety of ways, including downsizing some of their products and launching new items.

Mark Coleman: There was a day when canola oil [pricing made the product] a great buy in the spring of any year, and you could cover your needs until the following spring. Today, not even industry experts can tell you what [will happen] tomorrow. What happens globally can affect our markets here in the U.S., for sure. Currently, the European crisis and worldwide debt crisis is what is driving our markets. As of this writing, the Chicago Board of Trade is trading at roughly 50 cents per pound. Normal [prices] for soy oil since 2006 [have been] in the 35- to 40-cent range.

Chris Ferdock: The national brands have responded to rising raw material costs by passing the increase directly to mothers. In fact, the [national] brands initiated a combination of price increases and package count reductions in the range of 4 to 12 percent during 2011. As such, parents now pay much more to diaper their children than they did last year at this time. Certainly, this was not welcome news in a struggling category.

Dan Kelly: The national brands are passing along these increases, for the most part, depending on the situation and category.

PG's Store Brands: We saw a similar situation occur in 2008, and store brands benefitted greatly. Do you believe the latest price hikes offer another great opportunity for store brands?

Brandeisky: Consumers remain cautious about the overall economy and their own economic situation. Coupled with a higher retail price environment, that should spell opportunity for private brands in the category, as consumers seek the best possible value.

Coleman: In the oil category, maybe not, as the [national] brands are looking to stay alive and are dealing at record low levels to compete against private label.

Ferdock: The latest national brand adjustments have created some advantages, albeit short-term for store brand diapers. Specifically, the retail price gap on certain sizes has increased, creating a better value for store brands. And the package down count has also provided a value position to mothers.

Kelly: I definitely [believe so], particularly given the fact that most retailers operate on a percent gross margin process in their category budgeting, and that can actually widen the price gap between brands and private brands as pricing accelerates.

PG's Store Brands: What steps must retailers take with their store brands to help ease commodity cost increases and maintain an attractive price gap in relation to the national brands?

Brandeisky: We have been helping our private brand partners react to the rising price environment by following similar strategies as the national brands. Namely, downsizing on select nut types and also trying to bring more new product innovation to grow the category.

Coleman: The only thing they can really do is buy oil on the dips of the market, and that can be tough, as even industry experts cannot predict what the markets will do. Dollar cost averaging can certainly help, too, as the markets change. I feel it always makes good buying sense to have at least something in the books — that is, at least a certain percentage of the retailer's needs contracted out. This will help guard against the spikes in the market.

Ferdock: Actually, the recent national brand adjustments have created an automatic value for store brand baby diapers without the retailer needing to change anything. However, the changes have also created more consumer confusion during their in-store experience at the shelf. Typically, this favors national brands. As a result, we are proactively working with our retailers to address pack size mix and package counts in an effort to simplify the shopping experience while growing top-line sales.

Kelly: If retailers and suppliers can collaborate to anticipate commodity markets, both parties might be able to take a position to avoid cost increases. Conversely, if the market might drop — similar to what has occurred with exchange rates lately — taking a long-term position might not be beneficial.

PG's Store Brands: When we can expect to see relief on the commodity cost side?

Brandeisky: It is very difficult to predict the direction of commodities. Many of the pressures that have caused prices to rise — such as international demand — are not going away anytime soon. Hopefully, we will have better weather conditions, which could result in bigger future harvests. We'll know more as we go through the year.

Coleman: As of this writing, the markets are operating at very high levels. We are expecting a little relief to come with some oils, but only due to outside market factors — like the European Union and worldwide debt. One of the main reasons these markets are operating at these high levels is biodiesel and ethanol. There are very lofty government mandates in place for 2011, 2012 and 2015 that are causing large amounts of the soy and canola oil crops to be used for this purpose. If there were no mandates in play here, then the Chicago Board of Trade ... would be trading in the 30-cent range [for soy and canola oils].

Ferdock: During 2011, raw material costs rose to unprecedented levels and established new pricing plateaus in the industry. And although some softening can be expected in 2012, the recently established price plateaus will continue to hover around all-time-high levels and put pressure on store brand manufacturers to compete against national brand product innovation and promotional activity.

Kelly: So much depends on the global economy. It is very difficult to say when there will be an end — every commodity is different, so the situation is entirely up to those factors that affect supply and demand and [the economies] of those countries that are producing.