With more fees and higher prices, who's really to blame?

Consumers and politicians often pin the blame on retailers, but the real picture isn’t quite so clear. What’s driving high fees, and where do we go from here?

June 13, 2024
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With more fees and higher prices, who's really to blame?
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With more fees and higher prices, who's really to blame?

There’s a genuine misunderstanding about who’s to blame for additional fees and general price increases — and contrary to popular belief, it’s not usually retailers. 

President Biden called out grocery stores for making “suckers” of the American shopper, and that perception is growing. Look no further than this California law that will go into effect in July 2024. It forbids restaurants from charging hidden fees at the end of a meal, requiring them instead to list the full cost upfront in their menu prices. (Wait until you hear who's exempt, though.) 

On the whole, this blame is misplaced. 

Of course, there are exceptions, but most regional and independent retailers are just charging the prices required to keep the lights on. And while more needs to be done to rebuild trust with skeptical consumers, this situation is more nuanced than it appears. 

Inside third-party ‘fee-mongering’

Third party platforms that offer services like delivery, personal shopping, and subscriptions are growing in popularity. When the average consumer buys groceries on a third-party delivery platform, the item total isn’t quite the price they’ll pay. Cue the fee frenzy.

There’s a priority fee for ASAP deliveries; a travel fee for long-distance deliveries; a “service fee,” which usually goes towards things like incentives for Instacart shoppers; tip, which goes directly to the in-store shopper; a variable delivery fee, which depends on the user’s membership level, basket size, and basket composition; and regulatory fees, which are occasionally required by states or cities.

Obviously, consumers get frustrated with this parade of extra charges on items from groceries to concert tickets, and that’s perfectly understandable. But as you can see, it’s not the retailer benefitting from these charges; it’s the third party.

And remember that California law that’s banning restaurants from charging hidden fees? That law contains a carveout for food delivery companies, which may continue to show menu prices that the restaurant sets and then tack on their own fees at the end. That double standard — especially when many diners go on to associate the fees with the restaurant, not the delivery platform — is unfair to retailers. 

Retailer costs are outpacing price increases

Many of the fees that get tacked onto transactions today — think a service fee at a restaurant, or a charge for using a credit card instead of paying in cash — exist because it’s getting a lot more expensive to run a business. Our data shows that these retailers are indeed facing high operating costs, and the majority of them are not price-gouging.

Upside recently conducted a survey of retailers that showed that even as inflation cools, retailers’ the top concerns all revolved around cost. Nearly half of retailers listed inflation as a major headwind, and almost 40% said rising supply chain costs were top-of-mind, indicating that inflation and its related cost increases impact retailers just as much as consumers. 

In order to remain afloat, retailers have to protect their margin from environmental pressures, from third-party vendors, and from competitors. Some additional background on the industries that these retailers operate in might explain why they have been passing their cost burden onto their customers.

Consider the challenge that grocers specifically have faced over the past few years. Since January 2020, grocery prices are up by about 25%, according to the Bureau of Labor Statistics. Over that same period, costs have increased more than 28%. In other words, costs have increased faster than the prices that grocery stores can charge. 

In the cyclical fuel market, retailers deal with low-margin periods regularly. In fact, during the spring of 2022, inflation ran rampant and fuel prices skyrocketed due to supply issues caused by the invasion of Ukraine. Many fuel retailers were actually experiencing negative margins at that time, meaning they lost money on every gallon of fuel sold. Retailers accept these losses during low- and negative-margin times knowing they’ll have an opportunity to recoup that money during high-margin times.

Managing higher business costs without passing them onto consumers 

There’s probably no world where all third-party fees go away overnight, so retailers will have to creatively balance their priorities with the budgetary constraints of their customers. With the economy running hot, restaurants have been raising their prices to pass their cost burden onto the consumer — in October 2023, prices were up 5% year-over-year. However, the strategy is backfiring — customers feeling the pinch from inflation are trading down from full-service restaurants to cheaper quick-service options. In September 2023, foot traffic at full-service restaurants was down 4.3% year-over-year. Knowing that customers are no longer bearing the cost burden, restaurants are in search of other ways to offset their own rising costs. 

Given the challenges that retailers are facing, it would be prudent to reexamine the areas where they can manage costs end-to-end and take back control of the customer’s full lifecycle. That means getting more people to come through the doors of your brick-and-mortar locations for a supplementary revenue stream. 

And once retailers are able to serve customers in-person, they can offer those visitors value while still protecting their profit margin. That value is important because today’s consumers are feeling the heat from high prices. We’ve seen countless headlines as of late about large retailers reducing prices — while these businesses are taking strong steps to rebuild trust with shoppers, small and regional retailers without such command over the supply chain don’t have a lot of flexibility to drop prices. If a business doesn’t charge customers enough to cover the cost of operating the business, it will have to close — period. Fewer options are bad for the consumer, too, so nobody wins in that situation.  

In the context of today’s competitive pressures and economic headwinds, personalized promotions offer retailers the ability to win customer visits profitably. Personalized promotions are created based on consumer-related factors (not the business) and only lower prices for shoppers. They allow retailers to incentivize profitable behavior change by eliminating unnecessary discounting — maximizing their revenue without compromising margins.

Other strategies like dynamic pricing, which is based on business factors and allows prices to move up or down, can create “win-loss” situations for retailers and consumers. But personalized promotions always create “win-wins.”

So yes, there are some fees or pricing structures that are unnecessary and harmful to the consumer. But in many cases, those fees are related most often to third-party vendors and not the retailers themselves. Most retailers are not tacking on fees maliciously — they’re simply doing what they must to stay afloat.

Upside delivers personalized promotions that provide value to consumers and profit to retailers. Interested in finding win-wins with your customers? Get in touch.

With more fees and higher prices, who's really to blame?

Kevin Hart

Linkedin - Upside

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