Consumers are starting to push back against higher prices as inflation subsides, presenting challenges for consumer brands. During the peak of the pandemic, many major consumer brands justified their price increases by citing disruptive economic conditions and higher business costs caused by COVID-19. However, as these broad conditions stabilize, there are signs that consumers are becoming less willing to pay the higher prices.
This resistance is becoming evident as some consumer staples giants experience a drop in volume. Consumers are either trading down to private label brands or cutting back on purchases to save money. For example, Kraft Heinz saw its net sales grow by 2.6% in the second quarter due to price increases. However, its volumes dropped by 7% compared to the previous year. Similarly, Procter & Gamble reported a 1% decline in volumes in the latest quarter, prompting the company to emphasize the value its products provide through packaging and advertising.
This presents a conundrum for companies, as setting prices too high can result in the loss of customers, while setting prices too low can lead to significant profit losses. According to Kristina Hooper, chief global market strategist for Invesco, finding the right balance is crucial.
The pain consumers feel at the checkout counter has become a defining feature of the US economy and remains a prominent issue in Washington and on the campaign trail. As consumers begin to expect relief from high prices, consumer brands face the challenge of staying competitive.
Previously, higher prices drove significant sales growth, but as inflation subsides, this growth is expected to decline. Jason English, managing director at Goldman Sachs Global Investment Research, predicts that many companies will struggle to find growth in the current environment.
In response, several consumer brands have highlighted the resilience of consumer spending, even in the face of prolonged price increases. Coca-Cola’s CEO, James Quincey, acknowledged the shift in consumer behavior toward seeking value and stocking up on sale items. PepsiCo’s CEO, Ramon Laguarta, noted that while some consumers are optimizing their budgets, the majority of shoppers remain loyal to the company’s brands. As inflation eases, consumers may not immediately see lower prices at the checkout counter, but they can expect increased promotional activity, providing opportunities for savings.
Unilever has been navigating the inflation-comedown by recalibrating the balance between volume and pricing. The company’s US market continues to grow as inflation eases, but consumers are showing signs of caution. Graeme Pitkethly, CFO of Unilever, stated that different divisions of the company are in different phases of the inflation cycle. As pricing moderates due to lessened inflation, volumes have picked up in certain areas, leading to a balanced performance of price and volume in the first half of the year.
Michael Farr, chief market strategist for Hightower Advisors, believes that consumers are running out of disposable income due to increased credit card balances and the use of buy now, pay later options for essential purchases. Despite this, aggregate demand has remained resilient, indicating high propensity to spend.
As the US economy continues to navigate the effects of inflation, consumer brands will need to adapt to the evolving demands of value-conscious consumers. It is unlikely that deflation will be observed in consumer prices in the near future, but increased promotional activity and value offerings may help brands stay competitive and meet consumer expectations.
In conclusion, as inflation subsides, consumers are becoming less willing to pay higher prices, prompting consumer brands to face challenges. The ongoing balance between pricing and volume becomes critical for companies to maintain both their customer base and profitability. With increased emphasis on value and promotional activity, brands can navigate the changing consumer landscape and stay competitive in the market. As the US economy continues to evolve, consumer expectations and demands will play a significant role in shaping the strategies of consumer brands.
