Runaway inflation rates may now be coming back under control, but most retailers and FMCG manufacturers are experiencing challenges from consumers cutting back on discretionary spending and seeking bargains.
Dean Blake, print and features editor with Inside FMCG, moderated a Masterclass – the second in a series supported by Adobe – with the topic: How brands are navigating price pressures.
He spoke live with Rolf Weber, CEO of Marley Spoon, and Liana Lorenzato, chief marketing officer at Modibodi to find out how their businesses have fared during the spending crisis – how consumer habits have changed and how the companies have been adjusting their business models behind the scenes in response.
Lorenzato says Modibodi – which sells across five regions – Australia, the UK, New Zealand, Europe, and most recently the US – has found people are thinking more carefully about where they’re spending their money. But that does not necessarily mean they will buy a cheaper product, she clarifies: they will part with their money if they are convinced it is a better product, it’s something they love, that they know is going to fulfil their needs, and will last for a really long time.
The average number of items Modibodi sells per transaction has increased and customers are drawn to bundled packs that provide more value. “That seems to be consistent across each region, not just Australia.
“So the value proposition is really important to our customers.”
Weber says that while changes in consumer behaviour are beginning to stabilise and consumer confidence is returning, there is a new frugality apparent in Australian consumers’ dining choices.
“Consumers are questioning the value of dining out two or three times a week and maybe spending an extra day at home. We’ve seen the major [supermarket chains] reporting that they’ve seen a shift to more home cooking, and we are seeing it in the number of meals per week slightly increasing across both of our brands.”
Marley Spoon has responded by offering more meal choices and allowing customers to personalise their meals while keeping them at roughly the same price point. For example, customers who want to reduce their gluten intake can swap their normal pasta for gluten-free pasta. Weber says such strategies are increasing meal sales. “That leads us to believe that these particular customers who are already buying a value product, they’re looking for even more value and potentially cutting more of their external spend. So, we’ve seen those basket sizes go up due to external and internal factors.”
Managing costs
So, how has the rise in inflation and costs over the past year impacted from a business perspective, as opposed to customer behaviour?
“We’ve seen a balanced impact,” reflects Weber. “You know, we all remember the floods last year, with $12 lettuces and so forth. These insane pressures on costs and availability leading to a poor value proposition – especially in our meals – have dissipated. The majors have reported that overall, prices – especially in fresh goods – are coming down or stabilising. So that’s been a little bit of tailwind for us, which then helped us buffering some of the more general cost increases being added, such as energy.”
At the beginning of the year, Marley Spoon launched a probe into every cost in the business to see where savings could be made across the supply chain, which meant getting hard on suppliers and renegotiating contracts where it made sense.
“We also took various other measures around cutting the headcount, reducing spending on travel, and other areas, so it has been quite a holistic process that is ongoing. We have really doubled down and instilled a more rigorous cost consciousness across the business. Our leaders in every area across every department are much more attuned to look for costs, and then implement processes … to drive those costs out.”
Lorenzato agrees that the challenge of reducing internal costs is a central topic for every business currently, but Modibodi has been largely insulated to date thanks to purchasing and planning in advance. Moreover, Modibodi and its parent company collectively order in large volumes and have strong relationships with their partners and suppliers.
The importance of long-term thinking
Turning to how Australian retailers can offer competitive prices and maintain profitability In a market where consumers are more price-sensitive than traditionally, both panellists urged executives to look to the long term, rather than focus on short-term opportunities.
“That means you have to be ahead of the game,” says Lorenzato. “It’s important to plan and be across what could potentially affect the business economically, to understand that impact.”
But she warns it is equally critical not to board the “discounting train” as she calls it – “That’s a race to the bottom.”
Rather, she advises businesses to look for cost efficiencies in raw materials and the production process and – if cashflow allows – buy those materials on an annual basis rather than during quarterly manufacturing cycles because buying in bulk reduces costs.
“It’s nothing groundbreaking, but those really important things can incrementally add an opportunity to drive margin and profitability. When we’ve been able to do that, it has allowed us to run opportunity promotions without negatively impacting our margin.”
And manage those fixed costs, she adds. “If your fixed costs are locked in, it’s harder to then invest where you can really drive opportunity in your marketing channels because you only have a set budget. So you really need to look at where you can flex that spend and bring savings without jeopardising the opportunity to drive revenue.”
Weber concurs: “What helped us was we went into different planning horizons kind of three, six, 12 and 18 months ahead, and then added various scenarios. And then we built in some hedges, based on our forward-looking. So we go line by line, item by item to have a good guess on where a particular item is heading based on market prices, seasonality, global commodities and so forth. And then we have a better view of what’s going to happen, and we can financially plan for that. If you see where you’re heading, you can take the steps to provide cash flow much earlier … rather than being surprised when it suddenly hits.”
During the masterclass, Weber and Lorenzato covered other topics, including getting the balance right between acquiring new customers and working to retain existing ones; how consumers are responding to communication around offering greater value; and how to identify and unlock opportunities that a retail recession or a ‘spending crisis’ offer.
You can view the full Masterclass – supported by Adobe – here.
- Read about the previous masterclass here: How to nail the DTC experience: tips from leading brands.
