Consumers show signs of 'more resistance' to price increases

As the current bout of high inflation drags on into a second year, CPG executives are confronting a key question:

Will consumers continue to pay for their brands as prices continue to increase?

As inflation spiked during 2022, the answer was mostly a yes. While CPGs are reporting volume declines and private label demand rose at major retailers like Walmart, the phrase “muted” became common when questions on earnings calls turned to elasticities – or the threshold at which consumers will switch to another brand or private label. Having raised prices consistently, some CPGs are now seeing high enough sales to start to recover profit margins that depleted when the price increases started.

But in 2023, a change in tone is starting to emerge. While inflation across the economy is beginning to come down overall, the prices of every day goods are continuing to rise. Brands say they are continuing to face higher costs in commodities and the supply chain, but they must balance that operational reality with the fact that consumers have observed price increases for months now.

As public companies start to report results from the first quarter of 2023, there’s new evidence that consumers are cutting back.

McDonald’s is seeing “more resistance” to price increases than it was at the outset of inflation, executives said.

“We are seeing a slight decrease in units per transaction,” CEO Chris Kempczinski told analysts on Tuesday. “So things like, did someone add fries to their order? How many items are they buying per order? We're seeing that go down in most of our markets around the world – slightly, but it's still going down.”

Signs are also starting to emerge that consumers won’t keep paying the higher prices forever. The Consumer Confidence Index fell to a nine-month low in April amid worries that business and job conditions won't improve over the coming months, the Conference Board reported.

"Overall purchasing plans for homes, autos, appliances, and vacations all pulled back in April, a signal that consumers may be economizing amid growing pessimism," said Ataman Ozyildirim, senior director of economics at The Conference Board, in a statement.

A wavering disposition could change how consumers view price hikes, as well. According to new data from the consumer research platform Attest, 80% of shoppers believe brands are engaged in “greedflation,” in which brands use inflation as an excuse to hike prices. And 75% of the consumers surveyed said groceries experienced the most rapid price hikes.

There’s real risk that a shift in the consumer mood could challenge long-held brand loyalty. Attest found that 88% of consumers said they are now willing to try different products and services due to price pressures. The survey results show that 71% of consumers cited food and beverage brands as the types of products most likely to see switching to save money.

The message from top executives: To keep consumers, brands must offer something more than a higher price. As Coca-Cola CEO James Quincey has put it, the beverage brand "has to earn the right for price increases."

The approach is on view at home and personal care company Procter & Gamble. CFO Andre Schulten said consumers are still buying name brands like Tide detergent and Bounty paper towels, even though there are some signs of more careful use and less frequent restocking. But as inflationary pressures mount, he underscored that brands must bring new products and messaging to the market.

“We need to create product and packaging innovation, communication strategies and in-market executions that are able to provide value to consumers and retailers,” Schulten said of the company’s approach in Europe, where there is increased private label trade-down activity.

PepsiCo is observing some growth of private label purchases in waters and juices, as well as salty snacks, where the company’s Frito Lay portfolio has a big presence. CEO Ramon Laguarta said that while the growth in snacks is starting from a “low base,” the team is focusing on innovation and brand building that has helped it continue to gain market share.

As brands seek to stave off store brand switching, they have a number of levers. One is increasing promotions to drive sales through discounts. But care must be taken. There’s a risk of over-promoting that challenges the sustainability of a business. Offer too many sales now, and consumers won’t keep buying when normal prices return.

“I'm not a fan of renting share through promotion,” said Mike Hsu, CEO of paper products company Kimberly Clark. “...I'd rather earn it through the base business, through advertising innovation and making the products better.”

Deals may be a short-term balm, but it is loyalty, built over time, that encourages customers to stick with a brand, even when things are changing all around them. The brands that stand the test of time are engaged in that work all of the time, and are even investing to continue it now. Innovation is a long-term goal for many, just as it is an imperative in the present.

Price increases won’t last forever, but what brands do during this period can leave a lasting impression.