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In the push and pull between price increases from consumer goods companies and buying decisions from consumers, Procter & Gamble is finding that the balance is improving.
Volumes held up better than expected for the maker of Tide and Bounty in the quarter ended March 31, even as the company raised prices by 10%.
The company saw a 7% increase in organic sales from the same quarter of the prior year, while volumes fell 3%. It’s a sign that even as U.S. consumers buy fewer goods amid inflation, they aren’t completely changing habits, or turning away from name brands.
“The U.S. consumer, I think, is holding up well,” P&G CFO Andre Schulten told analysts Friday on the company’s earnings call.
With prices elevated due to inflation, consumers are using more items from their pantry before restocking and exercising more caution as they use replenishable staples like paper towels. But overall, “Any indication that we see on our business is that the consumer is still choosing P&G brands,” Schulten said.
The remarks will hold weight. P&G is a bellwether for the consumer economy, opening earnings season with the first look at the shopper mood from a major CPG for the quarter that started the year. While CEO Jon Moeller allowed that the economic picture could continue to be “a bit choppy,” the company is expressing a measure of optimism. It lifted its outlook to project organic sales growth of 6% for the year, as opposed to the previously-projected 4-5% increase.
To be sure, there are still challenges. As price increases continue with inflation still elevated, consumer goods executives are carefully monitoring whether consumers are opting for private label products over name brands. In the U.S., P&G executives said private label share is “stable,” with no movement in the past nine months.
However, that’s not the case in Europe, where P&G is observing more trading into private label, and posted wider volume declines of 7% in the recently-completed quarter.
Facing elevated costs, P&G is continuing to increase prices into the new quarter, having recently completed another round in the U.S. and Europe. As the company’s brands seek to continue to appeal to consumers who have the choice of a cheaper store brand, they are introducing new offerings in both products and packaging as they raise prices.
“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. “And that's what we're focused on. I don't think that trying to eliminate the price differential [with private label] is a meaningful and helpful strategy for us.”
The company is also putting extra energy into how it shows the value of its products.
“When we talk about Charmin Rollback because the product is more absorbent and has more strength, we explicitly talk about the ability for consumers to use less,” Schulten said of a recent toilet paper innovation.
With price increases continuing, consumers won’t return to their usual consumption habits right away. But executives are noting there’s room to continue to bounce back. Volumes have fallen at P&G for four straight quarters, but this quarter’s 3% decline was down from 6% in the December quarter. CEO Jon Moeller said to look for “volume to slowly improve over time, but it won't happen overnight.”
At a time of higher costs, the company has also moved into the mode of seeking to tighten operations. That includes the dollars it spends to advertise. CPG companies built up digital capabilities over the last decade, and saw spend increase with the rise of ecommerce in the pandemic. In this period, many are optimizing as they seek to continued profitability.
P&G is targeting more efficiency in media spend as it seeks to continue to reinvest in the business. Schulten said the company believes it can generate between $400 million and $500 million a year as it brings more capabilities inside P&G, and uses more digital tools to reach consumers.
“As ad spending becomes more efficient with our ability to in-house both scheduling and buying of media, more digital capability to be more targeted, that increases the ROI of every dollar we can spend. So, it actually makes investment in media spending more attractive.”
That can lead to reinvestment, both in more media, as well as product innovation. In the end, savings in one area can help boost the value proposition P&G communicates as it faces down the headwinds in the economy.
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Trending in Brand News
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.