Business

Have consumer goods price rises peaked?

Shoppers choosing to buy less has spooked large groups but costs unlikely to drop even as inflation moderates

An analysis by Jefferies found that consumer goods companies increased prices an average of 11 per cent year-on-year for three consecutive quarters, until the three months to July, in which the average rises pulled back to 9.7 per cent. Photograph: Brandon Bell/Getty

Madeleine Speed
Wed Aug 23 2023 - 12:29

“Here’s the good news – the pricing is done.”

With those words Miguel Patricio, chief executive of Kraft Heinz, offered some assurance to cash-strapped consumers as he delivered interim results earlier this month, giving hope that the cost of branded goods such as Philadelphia cream cheese and Heinz tomato ketchup would stop rising.

The US food maker is not alone. After raising prices to pass on raw material, energy and labour cost inflation to shoppers, some of the world’s largest consumer goods companies have signalled they might be ready to ease off.

At Nestlé, chief executive Mark Schneider said the company, which makes Nespresso and KitKats, would slow price rises in the second half of the year. French giant Danone’s chief executive Antoine de Saint-Affrique echoed the sentiment, saying, “it will be decreasing as we go through the next quarter but there will be still inflation”. Unilever chief financial officer Graeme Pitkethly said “we have passed peak inflation” and that while prices would continue to rise, the rate of growth would “moderate” through the year.

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According to analysis by Jefferies, consumer goods companies increased prices an average of 11 per cent year-on-year for three consecutive quarters, until the three months to July, in which the average rises pulled back to 9.7 per cent.

The prospect of a halt in price rises will be welcome news to consumers – but they are unlikely to see price reversals or even moderation. Shoppers will continue to pay for the considerable prices increases companies initiated in the first half of the year well into next year, according to analysts.

“They say pricing will moderate, naturally, because they were jacking up prices last year. So year-on-year the price increase becomes smaller – because they are not doing more additional pricing,” said Bruno Monteyne, analyst at Bernstein.

James Edwardes Jones, analyst at RBC, said consumer staple groups “almost never cut prices” and were more likely to boost promotional activity than actually drop the price of goods.

Saint-Affrique told analysts that Danone was moving away from “broad-based pricing discussions” to individual products, and “using promotion rather than our pricing”.

Huw Pill, the Bank of England’s chief economist, has warned that supermarket prices would still be rising much faster at the end of the year than overall inflation, in part because some had entered contracts to secure supplies when global commodity prices were at a peak.

Consumers have been more resilient to price rises than expected and have continued to buy popular brands, helping companies offset significant sales declines. But as the cost of living crisis drags on, it has become harder to maintain volumes, making them cautious about further price increases.

“They’re all slightly nervous about volumes,” said Edwardes Jones.

Reckitt’s interim chief executive Nicandro Durante said he was “cautious” about passing on price rises to “stressed” consumers in Europe. Heineken said its sales volumes had plummeted 5.4 per cent in the first half of the year, dropping further in the second quarter following “the cumulative effect of pricing actions”, while Nestlé also reported lower than expected sales volumes earlier this month.

Mike Watkins, head of retailer and business insight at NIQ, said consumer goods sales volumes in Europe were “the lowest in recent memory”, particularly in branded goods and fresh foods.

To manage higher costs, consumers had been shopping around at different retailers, buying less and shopping more often. “In Europe the manifestation of this is the growth of discount channels while in the US it was growth in dollar stores and warehouse clubs [such as Costco],” he said.

Retail giant Target lowered its annual profit forecast last week following disappointing sales as US consumers cut back on discretionary purchases such as food and home goods.

“[US] consumers are still willing to spend, but they have become increasingly cautious and selective amid still-high prices and tighter credit conditions,” said EY chief economist Gregory Daco. “This has translated into much slower consumer spending momentum after a strong start to the year.”

The down-trading has become more apparent as some companies reported significant loss of market share in first-half results. Unilever said the proportion of the business gaining share had fallen from 48 per cent in the first quarter to 41 per cent in the second quarter, the lowest level since 2018.

Monteyne said the loss of market share was an early sign that consumer confidence was dropping.

Kraft Heinz said it had lost some of its position in the second quarter of the year as a result of pricing its products higher than the market. “We are losing incremental share to brands who are promoting more than we are,” said Patricio.

Some categories were more resilient to down-trading than others. Consumer health manufacturers have seen volumes hold up better during the cost of living crisis, as consumers were more likely to trade down on food items than on over-the-counter medicines and personal care products such as toothpaste.

Consumers may be more likely to seek out cheaper food than cheaper personal items such as toothpaste. Photograph: iStock

GSK spin-off Haleon and Johnson & Johnson spin-off Kenvue reported better than expected sales in the first half of the year. “While consumers may be trading down in more discretionary and traditional staple categories, we have not seen this dynamic in our portfolio,” said Kenvue chief executive Thibaut Mongon.

Haleon’s chief executive Brian McNamara reiterated the sentiment, telling analysts that to date the company has not seen evidence of down-trading, even in Europe where private label was rapidly gaining share in other consumer categories.

Consumer goods companies have pushed back against accusations of profiteering by politicians and consumers, saying they put up prices to reflect higher commodity costs in order to protect their margins.

The costs of energy, shipping and most commodities have fallen from their highs last year following Russia’s full-scale invasion of Ukraine – but an analysis by Barclays found that the gross margins of 10 of the largest consumer goods companies were lower in 2022 than in 2019.

Bruno Monteyne said that after 18 months of raising prices, “most companies are now close to the level of price increases they needed to restore profitability”, as lower costs will begin to feed through.

However, some companies – such as those making affordable luxuries like fizzy drinks and confectionery – have managed to maintain volumes while pushing up prices. Some have indicated prices will have to rise higher.

Coca-Cola raised prices 10 per cent in the three months to June 30, which did not dent sales volumes in the same period. The drinks maker’s chief financial officer John Murphy told the Financial Times the company would continue to increase prices in the second half of the year. Chocolate maker Lindt also warned of further price rises after raising prices without sacrificing sales volumes.

Even Nestlé's Schneider said further price rises would be necessary, particularly on products that rely on cocoa and sugar, which have soared in price as a result of climate-related shortages.

“We still need to take the liberty to price where needed,” he said. – Copyright The Financial Times Limited 2023

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