Inflation, Prices and Profits: It’s A Slippery Slope

Originally printed in the June 2022 issue of Produce Business.

As we move forward in these inflationary times, the pressure increases on prices and, ultimately, sales and profits. Because of these pressures, upper management demands for increased sales and profits are reaching crisis levels. These financial measures become the total focus for upper management (especially those who are publicly held) and command the utmost attention to maintain the financial viability of the company and the stock price. Each financial period becomes the most important and the demands on each of the departments, especially produce, continue to escalate.

This increasing emphasis on higher sales and profits distorts a retail operation’s success by ignoring this inflationary spiral and is negatively affecting the amount of product being sold. The better produce retailers recognize this trend is inconsistent with success and once again reminds us that upper management “just doesn’t get it!”

As we all know, inflation is only partly responsible for the increases in prices throughout the store and especially in produce. A far more significant factor is the demand by upper management for increasing levels of sales and profits to bolster their bottom-line results. Unfortunately, a reciprocal effect of rising prices and profits is the decline in volume of produce sold — the higher the prices, the more the volume declines. This initiates an increasingly vicious cycle of inflated prices and declining volume that seems to gain momentum with every financial cycle. This process is inherently unsustainable and is one of the foremost challenges to the continued success of retail produce. As with everything in life, what goes up must eventually come down.

A reciprocal effect of rising prices and profits is the decline in volume of produce sold — the higher the prices, the more the volume declines. It’s a vicious cycle.

This is not a new phenomenon — it has happened repeatedly throughout the past, even in periods with little to no inflation. The increased price trajectory continues until it comes to a level where the price is simply too high and does not represent a value to the customer. This noncompetitive stance must be rectified and therefore prices, sales and margins all must fall back to more reasonable levels to sustain the viability of the operation. If this doesn’t happen, it will result in an increasingly dramatic reduction in share of market in the operating area.

The participant in this vicious cycle is at the mercy of this beast once it’s put into motion. The ultimate collapse of the inflated, unreasonable pricing and profit demands results in, at the very least, embarrassment and criticism from management and even can resort to the ultimate punishment, loss of employment.

If the produce retailer survives this catastrophe, what can he do to help his operation recover and avoid a repeat of this calamity? The answer requires a complete rethinking of the sales and profit strategy to protect organizational positive momentum and consumer confidence, and provide sustainable growth of sales and profits in the organization.

The solution to this scenario is not easy to accomplish. It requires a complete rethinking of the strategic sales and profit goals upper management uses to prepare the plans for each department. The old way of setting a sales goal and then applying a percentage of the sales to be generated as profit is a major cause of this vicious cycle. The more prices increase, the less volume is sold, therefore requiring a further increase in both sales and profit percentage to maintain forward momentum within the operation.

To break out of this pattern requires the responsible produce retailer to convince upper management of a different way to plan for pricing and profits. The best way to do this is to focus on dollars, not percentages. This successful strategy has been used many times by some of the most successful, inventive retailers around the world.

Management should set targets, not only for the sales generated, but for the dollars of profit to be generated. By doing this, you get a more realistic target for sales and profits that tends to stabilize and, in some cases, reduce prices.

We all recognize the higher prices go, the less volume we sell, and, conversely, lower and stable prices increase the volume we sell. It is this concept that must be sold to management to gain their solid support. It is not an overnight process and will require complete commitment and support from upper management and everyone in the operation to become a success and break the vicious cycle.

One cannot underestimate the effort it will take to initiate and successfully implement this fundamental type of change. However, as a wise retailer once said, “to be successful, you have to sell more stuff.” The key is to use dollars as a measurement and adjust prices so volume is increased and, subsequently, the dollars of sales and profit as well. It will require a courageous and steadfast plan of action to initiate these changes and generate the desired sales and profit dollars needed to move your operation forward. Your reward will be the establishment of a sustainable, healthy and vibrant produce operation well positioned to move successfully into the future.

Don Harris is a 41-year veteran of the produce industry, with most of that time spent in retail. He worked in every aspect of the industry, from “field-to-fork” in both the conventional and organic arenas. Harris is presently consulting. Comments can be directed to [email protected].