Rising Prices and Consumer Pushback in the Grocery Industry

by Warren Seah

Inflation may be cooling, but grocery bills continue to remain high. Consumers, however, are now showing resistance to paying exorbitant prices as the economy slows down.

A recent analysis of earnings transcripts revealed that several major consumer staple companies are planning to be more cautious with price increases in the second half of the year. Coca-Cola CEO James Quincey stated that their pricing is expected to moderate as they cycle through previous pricing initiatives.

For consumer staple companies, pricing has played a crucial role in driving growth in recent quarters. Procter & Gamble, for instance, exceeded expectations for earnings and sales, with a notable contribution from a 7% price increase implemented during the quarter. Coca-Cola also saw a significant increase in average selling prices by 10% in their latest quarter.

While these companies argue that price increases have been necessary to protect profits and counter higher commodity and labor costs, inflation has started to take a toll on their margins. Only a handful of the top 25 staple companies have witnessed year-over-year gross margin expansion, indicating the impact of commodity inflation.

As inflation slows down, some companies like Procter & Gamble, Mondelez International, and McCormick have experienced improvements in their margins this quarter, partially due to price increases. Keurig Dr Pepper also reported an expansion in quarterly gross margin, the first since the third quarter of 2021, which can be attributed to pricing.

However, these gains in top-line revenue and margins have come at the expense of volume. Higher prices have led consumers to react by purchasing less.

It is clear that shoppers are becoming more price-conscious amidst a slowing economy. While consumer staple companies have relied on price increases to maintain profitability, they are now faced with the challenge of balancing pricing strategies with consumer demands. The future will test their ability to satisfy both their bottom line and consumer wallets.

Companies Face Challenges with Volume in Latest Quarter

Roughly half of the companies analyzed reported a decline or lower-than-expected volume in their most recent quarter. For instance, Unilever experienced a 0.2% decrease in volume during the first half of the year, while Kimberly-Clark saw a 3% decline year-over-year in this quarter. Moreover, Pepsi’s second-quarter volumes fell short of Wall Street’s expectations.

The Impact of Prices on Volume

Hershey’s chief financial officer, Steven Voskuil, explained that the volume impact was primarily driven by price. He stated, “As we look at volume in the back half, yes, year-over-year, we expect it to be down, but it really is price-driven.” Noel Wallace, CEO of Colgate-Palmolive, concurred, acknowledging that the volume impact from reduced promotions exceeded their expectations.

Changing Consumer Behavior

Some consumers are turning to cheaper alternatives like private label brands, while others are becoming more cautious about discretionary spending and cutting back altogether. This shift in consumer behavior is influencing companies’ approaches to price increases in the latter half of the year.

Varied Pricing Strategies

Companies are adopting different strategies for price increases. Some have already implemented their increases for the year, while others anticipate a slowdown towards the end of the year as inflation trends down. These companies aim to be more targeted with their price increases. Market-to-market variations will also play a role, with countries experiencing high inflation (such as Türkiye and Argentina) likely to see more significant price increases compared to countries where inflation has slowed.

The Importance of Pricing for Companies

Pricing remains an essential aspect for companies. P&G CEO Jon Moeller emphasized that pricing is intertwined with innovation within their company. It has been a positive contributor to top-line growth in 48 out of their last 51 quarters. Moeller also expressed that as they strengthen their innovation program, they anticipate further opportunities to benefit from modest pricing.

You may also like

Leave a Comment