Inflation tests the pricing power of global brands

Some of the world’s largest consumer goods manufacturers are jacking up the prices of branded goods, from diapers to veggie burgers, testing their ability to pass higher input costs onto households.

Nestlé, Procter & Gamble and Unilever are among the global groups to have set price hike plans in their latest market updates following rising raw material prices and skyrocketing transportation and packaging costs .

“We are witnessing one of the highest commodity price inflation we have seen in a decade,” Graeme Pitkethly, chief financial officer of Unilever, said this week.

Mark Schneider, CEO of Nestlé, said last week: “It’s a very volatile environment right now, very low visibility, a lot of surprises are happening. We will take pricing action. “

While Nestlé, Unilever, Reckitt Benckiser and their competitors said they raised prices in the first quarter, most said the bulk of the cost increases – some of which were covered in the short term – had yet to be passed through to consumer shopping carts.

As hedging contracts expire and brands negotiate with retailers, that will change, said Will Hayllar, global managing partner at OC&C Strategy Consultants.

In the United States, Procter & Gamble and Kimberly-Clark have ad “Mid-to-high single-digit” price increases from year-end, covering essentials such as diapers and toilet paper.

“Typically, when rapid price inflation hits the consumer goods industry, there’s some margin squeeze for about a year and then most of it trickles down to the consumer,” Hayllar said.

Bruno Monteyne, analyst at Bernstein, said that brands that are strong in high-end or growing segments of the market will quickly become more expensive, while “those with weak brands in highly commoditized categories find it difficult to differentiate themselves from private labels and me-too brands.

“They will find it difficult to pass on cost inflation; raising prices first means being disproportionately punished, ”he said.

Commodity prices have hit record highs for several years or all time thanks to factors such as the impact of the pandemic on labor and logistics, countries like China building up their stocks and severe weather.

Palm oil, used in food and consumer goods, from pizza and chocolate to lipstick and shampoo, has reached levels not seen since 2008 following a shortage of migrant labor . The prices of other vegetable oils are increasing due to Chinese demand and the growth of biofuels. Dairy products and grains have been affected; in Europe, milk prices have increased by around 50 percent since the start of the year.


Soaring milk prices in Europe this year

Packaging costs have jumped nearly 40% since the start of 2020 amid intense demand, commodities data group Mintec said. Its global packaging index hit a record high on the back of sharply rising costs for paper and pulp, plastics and metals.

The commodity market tightening is expected to continue through 2021, while Pitkethly said he expects Unilever’s input cost growth to accelerate in the second half of the year.

Companies will try to offset some cost increases in other ways. François-Xavier Roger, Chief Financial Officer of Nestlé, said the group would look to “productivity gains, industrial efficiency gains and a product mix and innovation”. But he said that “the main way to fight input cost inflation is to raise prices.”

Richard Cook, head of the analytical products team at NielsenIQ, said “essential categories” such as wheat, eggs, cheese, bread and first aid items could easily raise prices. At the other end of the scale, high-end products – or those that meet specific needs, such as cakes and skin tanning lotions – could also see increases.

Line chart of Mintec Global Packaging Index ($ / Mt) showing prices for packaging materials have reached historic highs

Those that allow the consumer to make a statement about themselves, like vegan products and makeup, can also do that, Monteyne said. “Brands are a way to tax your emotions. The more we care about categories, the more we buy from them. “

He said “weaker” portfolios included Danone’s bottled water and dairy businesses, and Unilever’s food portfolio, which could be vulnerable to losing market share if prices rise too quickly. . “What has Danone really done to innovate and make yogurt more exciting?” He asked.

Products in growing areas such as take care of an animal will have little trouble raising prices, Monteyne said, while there are a few “big brands in the wrong categories” – Beyond Meat in the larger, more commoditized field of packaged foods, or Nespresso in coffee – with a strong pricing power.

Alcohol and “indulgent” products like chocolate and snacks appear vulnerable, Cook said; “Higher prices will most likely lead to lower demand,” he said.

Such products can opt for “shrinkage,” reducing portion sizes while keeping prices the same, said Hayllar. They can also start by modifying the promotional offers offered, rather than adjusting the list prices.

The uneven impact of the pandemic will affect the way households respond, Hayllar said. “The last real wave of commodity inflation was in 2012, and that added to the price sensitivity in the market,” he said. “[But] this time, there is a segment of consumers for whom there is repressed purchasing power. “

Not all businesses will take the same approach. Roger, from Nestlé, said that “overall our strategy is to compensate for everything we get through pricing”. But Unilever has said it will seek to avoid this.

“We operate in very competitive markets,” Pitkethly said. “And therefore, pricing becomes our tool of last resort, not our tool of first resort.”

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