Many shoppers have noticed that despite a slight decrease in inflation, grocery bills remain expensive. However, with the economy slowing down, consumers are now resisting paying higher prices. In the latest earnings transcripts of major consumer staple companies, it was found that eight out of twelve indicated a slowdown in price increases for the second half of the year.
Despite this shift, pricing has played a crucial role in driving growth for consumer staple companies in recent quarters. Procter & Gamble, for example, exceeded earnings and sales expectations, partially due to a 7% price increase implemented during the quarter following a previous 10% hike. Similarly, Coca-Cola experienced a 10% increase in average selling prices during its latest quarter.
While these companies argue that price increases are essential to protect profits and offset rising commodity and labor costs, only five out of the top 25 staple companies have seen year-over-year gross margins expand. This indicates that commodity inflation has put pressure on margins.
Fortunately, as inflation slows down, companies like Procter & Gamble, Mondelez International, and McCormick have observed improvements in margins this quarter, partially due to price increases. Keurig Dr Pepper also experienced an expansion in quarterly gross margin for the first time since the third quarter of 2021, thanks in part to pricing strategies.
However, these gains in top-line revenue and margins have come at the expense of volume. Consumers are responding to higher prices by purchasing less. As a result, consumer staple companies are realizing the need to adapt their pricing strategies to maintain customer loyalty without compromising growth.
In conclusion, while the impact of rising grocery prices is undeniable, there is now a significant shift in consumer behavior. As the economy slows down, shoppers are resisting paying higher prices for their favorite brands. This has prompted many consumer staple companies to reevaluate their pricing strategies and focus on sustaining growth while keeping customer satisfaction intact.
Companies Experience Softening Volume
Roughly half of the companies analyzed reported a decline or softer-than-expected volume in their latest quarter. Unilever’s volume fell by 0.2% in the first half of the year, while Kimberly-Clark (KMB) experienced a 3% year-over-year volume decrease this quarter. In addition, Pepsi’s second-quarter volumes did not meet Wall Street’s expectations.
Factors Influencing Volume Decline
Hershey’s chief financial officer, Steven Voskuil, explained that the decrease in volume is primarily driven by the impact of higher prices. He expects volume to continue to decline in the second half of the year, but emphasizes that it is largely price-driven. Similarly, Noel Wallace, the CEO of Colgate-Palmolive (CL), acknowledged that the volume impact from reduced promotions was greater than anticipated in the short term.
Changing Consumer Behavior and Its Effects
Consumers are increasingly turning to cheaper alternatives, including private label brands, and becoming more cautious about discretionary spending. This change in behavior has a significant impact on companies’ pricing strategies.
Diverse Approaches to Price Increases
Companies will adopt different approaches to price increases in the latter half of the year. Some have already completed their planned price increases for the year, while others anticipate slowing down price adjustments as inflation trends down. The focus will shift towards targeted increases. Market-specific conditions will also play a role, with countries experiencing high inflation, like Türkiye and Argentina, likely to witness more substantial price hikes compared to countries where inflation has stabilized.
Pricing Linked to Innovation and Growth
P&G CEO Jon Moeller emphasized that pricing remains a crucial element for the company’s growth strategy. He highlighted the correlation between pricing and innovation, stating that pricing has contributed positively to top-line growth in 48 out of the last 51 quarters. As P&G further strengthens its innovation program, it expects to continue benefiting from modest pricing.