After enduring some of the steepest price increases in decades on everyday goods from bread to toilet paper, shoppers are starting to balk.
The sales volumes of several of the world’s largest suppliers of consumer packaged goods proved surprisingly stronghelping them offset a historic rise in commodity prices and strengthen their profitability.
Recently released earnings reports showed profit margins rose last quarter at companies such as Kimberly-Clark, home to brands such as Kleenex and Huggies, cleaning products maker Clorox and Procter & Gamble, the world’s largest household goods group.
But as they try to restore margins to pre-pandemic levels, consumer goods companies are encountering resistance. Some powerful supermarket chains, which typically operate on thinner margins, are increasingly reluctant to agree to their price demands, people familiar with some of the negotiations said.
Until recently, suppliers could “pass on price increases because input costs warranted it,” said Ken Harris, consumer products consultant at Cadent Consulting. Retailers “pretty much acknowledged it was legit.”
The increases in the cost of raw materials, energy and shipping resulting from the disruption of the pandemic and Russia’s invasion of Ukraine have been so significant that “even if they [retailers] didn’t like it, it was hard to argue against it,” said Will Hayllar, partner at strategy consultants OC&C.
Since the start of this year, however, retailers have been “pushing back and saying ‘no,'” Harris said. Consumers were also “beginning to say they didn’t think the price hikes were justified”.
Ken Murphy, chief executive of Tesco, recently said that while the UK’s biggest retailer recognizes that its suppliers are facing rising costs, he is not afraid to have “direct conversations” with them to get better terms for buyers. Last summer, food company Kraft Heinz halted supplies of certain products to Tesco in a pricing dispute that has since been resolved.
Simon Roberts, chief executive of rival Sainsbury’s, insisted he was ‘absolutely committed to fighting inflation for our customers’. The grocer’s operating profit margins fell from 3.4% to 2.99% last year as it tried to mitigate rising costs.
By incentivizing consumer goods groups to obtain more favorable terms, retailers can signal a sharp reduction in the cost of certain inputs. Vegetable oil prices have almost halved from a year ago, according to UN data. Polyethylene, widely used in packaging, is down about a third, according to commodity analysis firm ICIS.
As a result, Hayllar said, “we’re getting to a point where these negotiations [between retailers and suppliers] it will be more difficult”.
However, the relief associated with lower input costs is far from universal. Steve Voskuil, chief financial officer of the Hershey chocolate factory, recently told analysts that cocoa and sugar prices were “moving in the wrong direction.” Sugar prices rose 23% last year, according to UN data.
“The basics are a bit mixed,” said Jeff Carr, chief financial officer of Reckitt Benckiser, although he added that overall cost inflation for British skin cream maker Clearasil and cleanser Cillit Bang was “much more manageable” this year. than the last.
Consumer goods groups have also turned to efficiency savings to support margins, although their contribution to profits is small compared to the price hikes that some companies have imposed.
Price increases of 10% on average in the first three months of the year boosted gross margins of P&Gmaker of Gillette razors and Head & Shoulders shampoo, more than doubling its cost-cutting initiatives.
Industry leaders have set aside the idea that they exploited inflation to fatten their profits. Most major consumer packaged goods groups, including P&G, are still operating with tighter margins than before the pandemic.
Clorox’s price increases, which chief executive Linda Rendle said were “cost-justified,” helped push its first-quarter gross margin to 41.8% from 35.9% a year earlier. , but it was still lower than the 43.4% reached in 2019.
Given continued cost pressures, not all companies in the industry became more profitable last quarter. Colgate-Palmolive’s gross margin fell from 58.5% a year ago to 56.9%, although chief financial officer Stanley Sutula predicted it would improve in coming months.
Although these figures suggest that inflation has not benefited these companies, supermarket managers not only fear that shoppers will increasingly be unable to cope with ever-higher prices at the checkout counters, but that retailers who are held responsible.
A survey earlier this year by dunnhumby, a data analytics group, found that US consumers believe grocery retailers’ net profit margins are 14 times higher than they actually are.
Retailers have pushed back on vendors’ attempts to raise prices ‘so you can inflate your margins’, while consumers tell us it’s our fault,” said Harris of Cadent Consulting.
So far, executives said, resistance to price increases has been more pronounced buyers and retailers in Europe and the United States. Household finances are more strained in Europe, where shoppers also have more options to switch from branded products to cheaper versions of the same products developed by retailers.
Last quarter, sales volumes for Unilever, the British maker of Dove soap and Ben & Jerry’s ice cream, fell 3% in Europe but rose 0.6% in the Americas, despite similar price increases in both regions.
Graeme Pitkethly, chief financial officer, said European consumers were “under pressure” and there had been a “switch” to supermarket own-brand products, in some categories such as bleach.
Yet in the United States, too, there are signs that consumers are becoming more reluctant to pay for increasingly expensive household products as the economy falters.
“We are still seeing quite aggressive price increases[in the US]but that is probably coming to an end,” said retail consultant Jan Rogers Kniffen. “Consumer demand is now starting to slow.”
Michele Buck, President and CEO of Pennsylvania-based Hershey, said while demand for confectionery has been robust, customers are “looking for more affordable options — whether it’s the channels they buy through, the private label, offers and promotion increase”.
Some executives have warned that further price increases are being considered in several categories. Carsten Knobel, chief executive of Henkel, the German company behind Persil detergent and Pritt glue stick, said “additional pricing is needed to further offset the pressures” of input costs, including inflation. salaries.
Henkel raised prices by an average of 12% in the first quarter of 2023, which hurt sales volume, which fell by 5.4%.
But as retailers harden their stance — and several input costs begin to fall — most executives said the worst of the pricing pressures for shoppers were likely over. “Most of the prize was taken last year,” said Nicandro Durante, chief executive of Reckitt. “I don’t see a lot of price increases going forward in 2023.”
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