Value engineering threatens own-label product quality
A huge 85% of respondents said the quality of own-label products was threatened by excessive value engineering, compared with 81% last year. More people (77% against 73% in 2010) claimed pricing pressure was cutting into new product development resources, while 81% (78%) of retailers were threatening to commoditise branded products via excessive promotional activity.
A number of respondents cited retailer promotional activity as an area of concern. If, as many economists believe, the coming year promises to be even tougher as consumers' purchasing power is eroded by inflation and pressure on employment, the multiples are likely to increase the number of promotions they run as they seek to protect footfall against their competitors.
"The trend on promotional spend is marked," noted one director. "I'm sure you've seen the Nielsen numbers that show the level of spend on offer by month/year. Back in 2007, the proportion of total spend on offer was 27% of the total. By comparison, in 2010 this had risen to 34%.
"All indicators suggest this trend is continuing this year. While this is a trend that may be set to continue, an unanticipated consequence for some businesses is the net dilution of their average selling value per unit."
He added: "Promotions used to work because you could generally expect a sizeable uplift in volumes and the economics worked for the producer. In this regard, the world is definitely changing."
The pressure on the price of products in conjunction with soaring raw materials, utility and oil costs which they have largely been unable to pass on to their customers means that firms' profit margins are being badly squeezed.
"With the thin margins most manufacturers survive on, passing on inflation like this really is a matter of survival," remarked one finance director. But many are finding that passing on costs to retail customers isn't that easy.
"The upward trend in raw material price is definitely affecting us," said the director of a gluten-free bakery. "We are having difficulty getting increased prices from our customers."
Another md of a meat products firm said: "We certainly have felt the impact of volatile (upward) commodity prices, and of course our customers are resisting these pressures in varying degrees. At least the widespread publicity surrounding food inflation, and especially wheat costs, has made buyers aware of the issues."
He added: "Some customers have opted for value engineering opportunities to try to avoid such inflationary pressures and we have also seen an increase in 'tendering' exercises where customers are benchmarking in the face of cost pressures."
