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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.
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Campbell Soup Company CEO Mark Clouse offered thoughts on messaging amid inflationary shifts in consumer behavior.
After months of elevated inflation and interest rate hikes that have the potential to cool demand, consumers are showing more signs of shifting behavior.
It’s showing up in retail sales data, but there’s also evidence in the observations of the brands responsible for grocery store staples.
The latest example came this week from Campbell Soup Company. CEO Mark Clouse told analysts that the consumer continues to be “resilient” despite continued price increases on food, but found that “consumers are beginning to feel that pressure” as time goes on.
This shows up in the categories they are buying. Overall, Clouse said Campbell sees a shift toward shelf-stable items, and away from more expensive prepared foods.
There is also change in when they make purchases. People are buying more at the beginning of the month. That’s because they are stretching paychecks as long as possible.
These shifts change how the company is communicating with consumers.
Clouse said the changes in behavior are an opportunity to “focus on value within our messaging without necessarily having to chase pricing all the way down.”
“No question that it's important that we protect affordability and that we make that relevant in the categories that we're in," Clouse said. "But I also think there's a lot of ways to frame value in different ways, right?”
A meal cooked with condensed soup may be cheaper than picking up a frozen item or ordering out. Consumers just need a reminder. Even within Campbell’s own portfolio, the company can elevate brands that have more value now, even if they may not always get the limelight.
The open question is whether the shift in behavior will begin to show up in the results of the companies that have raised prices. Campbell’s overall net sales grew 5% for the quarter ended April 30, while gross profit margins held steady around 30%. But the category-level results were more uneven. U.S. soup sales declined 11%, though the company said that was owed to comparisons with the quarter when supply chains reopened a year ago and expressed confidence that the category is seeing a longer-term resurgence as more people cook at home following the pandemic. Snacks, which includes Goldfish and Pepperidge Farm, were up 12% And while net sales increased overall, the amount of products people are buying is declining. Volumes were down 7%.
These are trends happening across the grocery store. Campbell is continuing to compete. It is leading with iconic brands, and a host of different ways to consume them. It is following that up with innovation that makes the products stand out. Then, it is driving home messaging that shows consumers how to fit the products into their lives, and even their tightening spending plans.
Campbell Soup is more than 150 years old, and has seen plenty of difficult economic environments. It is also a different business today, and will continue to evolve. At the end of the day, continued execution is what’s required.
“If it's good food, people are going to buy it, especially if it's a great value,” Clouse said.