Chief Pricing Officer

Today Businessweek magazine is featuring comments from my friend and colleague Mike Neal (CEO, SignalDemand) on its homepage in reference to the article “Grocery Stores Fight Back Against Food Prices.”

According to its editorial staff, Businessweek’s new online “In Your Face” section highlights readers that offer “smart, incisive comments that move the conversation forward” - and this week the topic is Food 2.0:

The article is a worthwhile read, taking a look at the quickly forming “battleground” over food prices. Here’s an excerpt to give you an idea:

A year ago, when the cost of commodities such as wheat, oil, and corn was soaring, grocers grudgingly accepted price increases from Kellogg (K), General Mills (GIS), H.J. Heinz, (HNZ) and other food manufacturers. The strange thing is, those price tags never came back down, even when commodity prices collapsed in the fourth quarter of 2008. As a result, grocers have little cheer to offer their shoppers at a time of deepening economic gloom. “The prices don’t seem to go down as fast as they go up,” says Jeffrey Noddle, CEO of Minneapolis-based Supervalu, one of the nation’s leading grocers.

Now, the grocers are demanding action. On Jan. 7, Noddle told analysts to expect a “battleground” over the next six months as he pressures manufacturers to adjust their prices. And if they refuse? “In almost every category,” notes Noddle, “you have other vendors to look to.”

The food companies recognize that increases in the price of food outpaced commodity inflation during the fourth quarter last year, which should have resulted in higher profits. However, they argue, previous price hikes didn’t completely cover escalating production and commodity costs….

And for your convenience, Mike Neal’s comments in full:

Every major food producer has been anticipating this impasse. The problem lies in the fact that many producers don’t have the ability to accurately resassess their risk if they were to adjust prices. In order to confidently renegotiate contract prices, food producers must be able to accurately calculate the impact of price changes on volumes and margins, for each product line and customer contract.

Part of that calculation is a prediction of the success of demand shaping with strategic price changes. Without this knowledge and assurance, food producers with long term contracts could be effectively signing their own death warrants if faced with another jump in commodity prices.

Fortunately, technology has caught up with the pressures of the global marketplace and food producers are starting to adopt technologies that allow them to bring a new transparency and confidence to price strategy and contract negotiations. I envision that a new role - Chief Pricing Officer - will emerge from this awareness of the powerful strategic role pricing can play in the enterprise.

All you price professionals out there - what’s your take? Weigh in with a comment of you own on ChiefPricingOfficer.com.

Rip

Recently, Dave Dewalt of Franklin Foodservice Solutions shared his perspective on the current state of foodservice price strategy with the CPO blog.

Dave Dewalt, Franklin Foodservice Solutions

Dave works with some of the largest, best-known food companies in the world to tighten up their pricing practices, tune up their redistribution programs, trim their product lines and generally improve business through improving pricing programs. Dave has a masters in marketing and finance from the Kellogg Graduate School of Management at Northwestern University and he worked with Sara Lee Bakery, Vlasic foods and Awrey Bakeries before joining AT Kearney as a management consultant. He launched Franklin Foodservice Solutions in 1996 and in 2006 helped launch the SMART Share Group of Food Service Broker Agencies, which broadened his perspective on foodservice issues.

Dave offers an excellent monthly e-newsletter, featuring an article from SignalDemand’s Chief Scientist Bob Pierce this month: “Get Smart About Foodservice Pricing.” You can subscribe to the Franklin Marketing Insights newsletter or download the current issue from the Franklin Foodservice Solutions homepage. The current volume is also posted on the SignalDemand “In the News” section of its Website, here.

Here’s what Dave had to say about the pricing challenges faced by all foodservice manufacturers today:

Most organizations believe that they are totally unique in their challenges. What shared price-related challenges do you see across all sizes and types of foodservice companies?

I see the major distributors taking an intense interest in understanding the manufacturer’s logistics costs, and working to separate them from product costs. This might ultimately lead to changes in manufacturer price structures, pickup allowance programs, and policies. Distributors want manufacturers to make transportation and warehousing costs transparent, then work with the distributors to determine the best way to share these costs.

The challenge for manufacturers is twofold:

• To quantify their costs at a level of detail which is unprecedented for many

• To share this information with trading partners, which requires a level of trust which has historically been lacking in many manufacturer-distributor relationships

In your opinion, in what way has the introduction of increased commodities volatility changed pricing for foodservice companies?

Many food manufacturers adopted “formula pricing” models for low value-added producs sold to major chains (pricing based on a published commodity cost plus a “conversion cost”). In some cases, the supporting assumptions and math were not particularly accurate, but manufacturers priced to get the business, and in times of stable commodity costs, everyone “got by.”

With significant swings in commodity costs, these programs are being called into question. In the worst cases, customers refused to accept the price increases which resulted from applying the formula to high commodity prices, sending everyone back to the table. Hopefully, manufacturers, distributors, and large operators are reconsidering these programs, and supporting them with better documentation and clearer understanding of what will happen the next time markets become volatile.

Wholesale pricing for the food industry is certainly going through a period of change, and transparency of costs is definitely emerging as a top priority. Commodities volatility is requiring that everyone evaluate their pricing programs, hopefully instigating a renewed commitment to really optimize price strategy using the technologies now available to weigh costs, supply and demand factors - rather than relying on old models that were used to eek by in the past.

Thanks, Dave!

At last week’s SIGNALS 2008, SignalDemand’s annual executive summit, I was honored to participate in discussions and listen to presentations from renowned economists, pricing experts and senior manufacturing executives on the theme of “Forecasting the Future.”

The event was a reality check in terms of what the manufacturing industry is facing - a tightening squeeze due to continuing input cost volatility and, now, an economic crisis that weighs on both ends of the industry: pressure on the production side and shifting demand on the consumer side. But, SIGNALS also offered expert words of wisdom and practical advice on the importance of price strategy to help manufacturers not only survive, but actually thrive in these times.

Some highlights from SIGNALS:

• Dan Ariely, Ph.D. and Duke University professor, shared his astute observations on negotiations and our own weaknesses (more on this in future CPO posts).
• Gary Ray, president of Hormel, highlighted the importance of forecasting and price strategy at Hormel Foods.
• CPO panel: Pricing experts Bill Chandler from Cargill and Scott Newman from Ventura, demonstrated how they have truly elevated the pricing function within their organizations.
• Tom Elam, Ph.D. and president of FarmEcon, an agricultural and food industry consulting firm, presented impressive research on the changing linkages between food and fuel.

Bottom line: If you deal with price strategy in manufacturing, SIGNALS is a must-attend event.

Reuters’ veteran commodities reporter Bob Burgdorfer published a profile of SignalDemand yesterday establishing them as the only company offering a margin optimization solution to the food and meat industries on a large scale. The article was titled “Food Price Volatility Helps SignalDemand” - here is an excerpt:

“…SignalDemand’s software uses algorithms and econometric modeling, allowing customers to input the cost of ingredients such as corn, wheat, or soybean oil, to determine how much to charge for finished products.

Companies  can also calculate how high or low their prices need to be in the future, because sales contracts to restaurants and other food service customers are often for a one-year period.

‘The tremendous volatility is making people nervous about long-term contracts,’ said [Mike] Neal, [CEO of SignalDemand]…”

Commodity markets swinging high and low, combined with the global economic downturn means that manufacturers can’t afford to not be on their toes. Manufacturers need highly accurate forecasts to give them confidence to commit to long-term contracts.

Lucky for them, SignalDemand is up to the task - ready and able to help manufacturers compete in a tight market. (Disclaimer: I am a board advisor for SignalDemand)

As is - unfortunately - too often the case with government economists, Federal Reserve Bank of Atlanta President and CEO Dennis Lockhart told us last week what we already know: Prices are too high.

Lockhard said that food prices have inflated 6.5 percent through the first half of 2008, while motor fuel jumped 32 percent and home utility costs rose 21 percent. According to Lockhart, those three things account for 25 percent of all consumer spending.

There was good news too, as Lockhart also predicted that inflation would ease as the overall sagging market naturally tamps down inflation. But, there’s still only one key takeaway for American manufacturers and consumers: It’s going to cost more to produce things and buy the products made.

The easing of inflation will be a welcome respite for all involved. But, ultimately, it will be like that 90 degree day after it’s been in the 100s for days straight: It’s nice, but still not too comfortable. Inflation, or at least volatility, will be with us for awhile, and price is quickly becoming the new flashpoint for the 21st Century. For manufacturers, smart pricing is essential in an inflated market - finding the correct balance between cost and demand, as supply prices spike, is quickly becoming the most important new business calculus of our time. Companies that have the correct insight into how to properly buy and sell will emerge as the new leaders, while those that don’t will struggle.

That’s an easy side to choose.