Consumers have reacted in a surprising way to inflation, which has pushed prices higher on groceries, clothing and toys at a rate not seen in 40 years. They don’t seem to mind all that much and have kept spending money the same way they did before.
However, consumer-product companies know that a good thing can’t last forever. They’re rushing to implement price hikes while they still can. “It’s basically like, hey, the window is open now,” said Kevin Grundy, an analyst at Jefferies.
That window could close swiftly when shoppers begin to feel squeezed by inflation and are forced to pull back on spending. Talk of a potential recession is adding urgency to the matter. “Trying to catch up on pricing in a recessionary environment is very hard,” James Quincey, CEO of Coca-Cola, said on the company’s earnings call last week. “And so we have a bias to action.”
Since Coca-Cola doesn’t know the exact moment when spending might drop, the company isn’t waiting around until it misses its chance. “We’re going to err towards taking the price increase rather than not taking the price increase. That’s kind of our modus operandi,” Quincey said.
Most companies have been able to successfully pass higher costs on raw materials, transportation and labor to shoppers without alienating anyone because competitors are also raising prices. Even private-label store brands, which are favored during times of economic hardship, aren’t immune to rising costs. Retailers like Walmart and Target, which pride themselves on being competitive on prices, are acquiescing to suppliers who say they must increase prices.
The big consumer-products companies — behind popular household brands like Dove body soap, Gillette razors and Pampers diapers — have happily reported to shareholders that elasticity, which captures how much demand for a product falls when prices go up, generally remained at or below expectations through the first quarter, ending March 31. That has helped them grow their sales even as they work to recover margins hit by rising costs.
“You continue to see a flight to big brands,” said Grundy, with consumers not letting go of small indulgences, like a Coke with lunch, even if the bottle might cost 20 or 30 cents more. At least not yet.
As government stimulus fades farther in the rearview mirror, people dip into savings and inflation marches higher, hitting 8.5% in March, companies are bracing for consumers to scale back on spending.
“We recognize at the price levels we’re putting into the market, they will create stress on the consumer,” said Michael Hsu, CEO of Kimberly-Clark, maker of Kleenex tissues and Scott toilet paper.
Many companies are adjusting their outlooks accordingly, assuming that demand will be dented as shoppers are eventually pinched by inflation and look to make their paychecks stretch further, either by foregoing certain purchases or switching to cheaper alternatives.
In preparation, Procter & Gamble has begun putting cost front and center in more of its marketing materials. For instance, while Tide laundry detergent may be more expensive than other brands, the company is telling customers they can nearly offset the cost by switching from hot water to cold water, thanks to its special cold-water formulation.
The company has also shifted away from discretionary products to everyday essentials, and expanded its options at various price points. Can’t afford Pampers Pure at about 40 cents a diaper? Try Luvs for half the cost. It has also established a presence in the dollar stores.
“All of those leave us in a better position than we’ve ever been to deal with the potential consumer that’s more budget constrained,” said P&G Chief Financial Officer Andre Schulten.