Have consumer goods price rises peaked?

"Great news! The pricing has been finalized."

During his recent announcement of interim results, Miguel Patricio, the CEO of Kraft Heinz, provided reassurance to consumers with financial constraints. Patricio expressed optimism that the prices of popular branded products such as Philadelphia cream cheese and Heinz tomato ketchup would no longer increase.

The food manufacturer in the United States is not the only one facing this issue. Several major consumer goods companies worldwide have also indicated their willingness to reduce the burden on shoppers by increasing prices to cover the rising costs of raw materials, energy, and labor.

In the blog post, it was mentioned that Nestlé's CEO, Mark Schneider, announced that they will be reducing the increase in prices in the latter part of the year. The CEO of French company Danone, Antoine de Saint-Affrique, expressed a similar view, stating that although there will still be inflation, it will be decreasing during the next quarter. Graeme Pitkethly, the CFO of Unilever, also commented on the situation, stating that they have reached the highest point of inflation and although prices will continue to rise, the rate of growth will slow down as the year progresses.

Jefferies' analysis reveals that consumer goods companies raised their prices by an average of 11 percent compared to the previous year for three quarters in a row. However, during the three-month period ending in July, the average price increases slightly decreased to 9.7 percent.

Consumers will be pleased to hear that there could be a pause in the increase of prices. However, it is highly unlikely that they will witness any significant decrease or even a slowdown in prices. Experts suggest that shoppers will continue to bear the burden of the substantial price hikes that companies implemented during the first half of this year, and this will persist well into the following year.

"They claim that pricing will stabilize organically as they were inflating prices last year. As a result, the year-on-year price hike will decrease as they refrain from implementing further price increases," explained Bruno Monteyne, a researcher at Bernstein.

According to James Edwardes Jones, an RBC analyst, consumer staple industries rarely decrease prices and are more inclined towards increasing promotional efforts rather than reducing the cost of products.

Saint-Affrique informed analysts that Danone was transitioning from engaging in wide-ranging talks about the prices of their products to focusing on each individual product, employing promotional strategies instead of relying solely on pricing adjustments.

Huw Pill, the top economist at the Bank of England, has cautioned that grocery prices will continue to increase at a higher rate by the end of this year compared to the general inflation level. This is partly due to certain supermarkets having signed contracts to procure resources when global commodity prices were at their highest point.

Customers have shown greater resistance to price hikes than initially predicted and have consistently purchased well-known brands, allowing businesses to counteract substantial decreases in sales. However, as the ongoing affordability issue persists, maintaining sales levels has become increasingly challenging, causing companies to exercise caution when considering additional price raises.

"They all seem to have a hint of anxiety regarding the quantities," Edwardes Jones mentioned.

Nicandro Durante, the temporary CEO of Reckitt, expressed his concern about increasing prices for European consumers who are already experiencing financial strain. Heineken experienced a significant decline in sales by 5.4% during the first half of the year, which worsened in the second quarter due to the combined impact of pricing measures. Additionally, Nestlé recently announced lower sales volumes than anticipated.

According to Mike Watkins, who holds the position of retailer and business insight lead at NIQ, the sales figures for consumer goods in Europe were at their lowest levels in recent history. This decline was especially evident in the sales of branded products and fresh food items.

In order to handle increased expenses, customers have been exploring various stores, purchasing fewer items, and shopping on a more frequent basis. "In Europe, this trend is evident through the rise of discount outlets, whereas in the US, it can be seen in the increasing popularity of dollar stores and warehouse clubs like Costco," he explained.

Last week, Target, a major retail chain, reduced its yearly profit prediction after experiencing inadequate sales. This decline in sales can be attributed to American shoppers decreasing their spending on non-essential items like food and household products.

"[US] customers are still inclined to make purchases, but they have grown more careful and discerning due to persistently high prices and stricter availability of credit," stated Gregory Daco, the chief economist at EY. "Consequently, there has been a significant decline in the rate at which consumers are spending, after a robust beginning to the year."

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The phenomenon of down-trading has become more evident as certain businesses have experienced a notable decline in their market share during the first half of the year. Unilever recently disclosed that the percentage of their business that saw an increase in market share decreased from 48 percent in the first quarter to 41 percent in the second quarter. This figure represents the lowest level observed since 2018.

Monteyne noted that the decline in market share indicated a preliminary indication of diminishing consumer trust.

Kraft Heinz has acknowledged a decline in its market standing during the second quarter due to the decision of increasing prices of its products beyond market levels. Patricio, CEO of Kraft Heinz, stated that they are observing a loss of additional market share to brands that embrace more aggressive promotional strategies.

Certain categories were able to withstand the effects of downgrading more effectively than others. Manufacturers of consumer health products experienced less decline in sales during the period of economic hardship, as consumers were more inclined to cut back on spending for food items rather than on essential over-the-counter medicines and personal care products like toothpaste.

Haleon, a company that was separated from GSK, and Kenvue, a company that was separated from Johnson & Johnson, announced that they achieved sales that surpassed expectations during the first six months of the year. Thibaut Mongon, the CEO of Kenvue, stated that although consumers may be choosing cheaper options in certain categories, this trend has not affected their products.

Haleon's CEO, Brian McNamara, made it clear that the company has not observed any signs of customers switching to lower-priced options, even in Europe where in-house brands were becoming more popular in various consumer sectors.

Companies in the consumer goods industry have responded to allegations from politicians and consumers alike, defending their pricing strategies by explaining that they adjust prices to account for increased costs in raw materials. This adjustment is necessary for companies to maintain their profit margins.

The prices of energy, transportation, and several raw materials have declined since Russia's full-blown invasion of Ukraine, reaching levels lower than last year. However, according to Barclays' analysis, the profits made by 10 major consumer goods corporations in 2022 were lower compared to those in 2019.

According to Bruno Monteyne, a significant period of increasing prices has allowed most companies to nearly reach the desired level of price hikes that would ensure their profitability is restored. This is primarily due to the expected reduction in costs that will soon start to take effect.

On the other hand, certain businesses, like those producing reasonably priced indulgences such as carbonated beverages and sweets, have been able to sustain their sales levels while increasing their prices. Some of these companies have even suggested that prices will need to be raised even more.

Coca-Cola increased their prices by 10% between April and June, but this did not have a negative impact on the amount of drinks they sold during the same time. The person in charge of finances at Coca-Cola, John Murphy, informed the Financial Times that the company plans to keep raising their prices during the second part of the year. Lindt, a company that makes chocolate, also mentioned that they might increase their prices even more, as they have already done without it affecting the amount of chocolate they sell.

Nestlé's Schneider also acknowledged the need for additional price increases, especially for products that heavily depend on cocoa and sugar. These particular ingredients have experienced significant price hikes due to scarcity resulting from climate-related factors.

"He expressed the importance of having the freedom to determine prices as necessary."