US companies bet buyers will continue to pay higher prices
Some of the world’s biggest companies are betting that consumers will continue to pay more for items ranging from coffee to toilet paper.
Corporate giants including Procter & Gamble Co.
, Nestlé HER
and Verizon Communications Inc.
say they plan to continue raising prices or pushing customers to buy more expensive products until 2022 to offset rapidly growing costs amid a global supply chain crisis. Gillette razors, Nestle coffee and Chipotle burritos are among the products that could become more expensive in the coming months.
So far, the price increases have paid off for basic household goods makers as buyers, especially in the United States and Western Europe, have remained loyal to the big brands.
Now, companies are relying on customers to increase sales and offset the higher costs that have weighed on their bottom line, even as broader inflationary pressures intensify and some analysts question whether buyers will start looking for alternatives. less expensive.
“We haven’t seen any material backlash from consumers,” P&G CFO Andre Schulten said last week, referring to a series of price increases that took effect in September. “So it makes us feel good about our relative position. “
Many consumers have accumulated savings in the midst of the pandemic and are enjoying higher wages, leaving them with extra cash, as the highly contagious Delta variant of the coronavirus keeps them at home and decreases the attractiveness of dining out, staying. in hotels and traveling by plane.
Companies benefiting from the momentum have told investors to expect strong sales and profitability in 2022, although rising costs from supply chain issues show no signs of abating.
P&G, makers of Tide detergent and Pampers diapers, last week announced a third round of price increases, which will take effect over the next few months, and told investors to expect profitability to rise. ‘accelerates throughout the year.
Nestlé, the world’s largest packaged food company, has raised its full-year forecast for the second quarter in a row as consumers continue to drink more and better coffee at home even as pandemic restrictions relax.
Mexican Grill Chipotle Inc.
said the price increases haven’t deterred people from its burritos. Higher menu prices helped net income more than double in the last quarter, compared to the previous year, despite higher labor and commodity costs.
and Verizon, the country’s leading mobile carriers, have both told investors their revenue growth will increase this year in part by persuading users to switch to premium plans paired with streaming media subscriptions or other advantages like inexpensive iPhones.
Analysts questioned whether Nestlé’s confidence in demand for expensive coffee was being overstated. Others have questioned whether P & G’s market share gains will erode or reverse as its price increases rise and consumers are increasingly squeezed by inflation.
The two companies have renewed their confidence. Nestlé said its coffee category is its biggest contributor to growth, with its Nescafé, Nespresso and Starbucks brands all growing. P&G said the investments the company has made over the years in better quality products with new features, such as new razor blades and handles and softer toilet paper, will allow consumers to pay higher prices. high even though household budgets are tightening.
US inflation accelerated in September. The Consumer Price Index, which measures what consumers pay for goods and services, rose 5.4% from the previous year, equaling its highest rate in more than a decade, the Department of Labor said. Many economists expect this period of rising inflation to continue.
“As some of the stimulus wears off and people start paying their rents, pricing is going to become an issue,” said Nik Modi, analyst at RBC Capital Markets.
Mr Modi said that large companies with well-known brands would be more likely to succeed in raising prices than smaller brands or brands in a given category because they are better able to keep products in stock and buyers consider often well-known names as a safer bet.
“I don’t see what else we can do other than pay it,” said Lawrence Tam, 43, of Houston. He said he was alarmed at the increase in meat prices; the cost of bacon recently doubled at her local grocery store. But Mr Tam, who runs a ketogenic diet group, said that even though he has started looking for cut-price meat, he and his wife are unlikely to make any major changes on other items. household.
““We are seeing some pretty shocking price increases, but consumers have absorbed those prices without falling demand.”“
“We’re seeing some pretty shocking price increases, but consumers have absorbed those prices without a drop in demand,” said Ben Reich, managing director of Datasembly, which collects granular price data on a range of consumer goods.
Price increases in U.S. grocery stores rose an average of 1.18% in September compared to a year ago, nearly three times the average increase in early 2021, according to the firm, which plans to launch this week. a publicly available price index for American grocery stores.
P&G has largely waited for rivals on price increases, which began to take effect in September, months after companies such as Unilever PLC and Kimberly-Clark Corp.
put their increases into effect.
A price misfire can be costly.
In 2019, Clorox Co.
increased the prices of Glad trash bags. Retailers pushed back and stockpiled competing offerings, slashing the company’s sales and giving Glad’s main rival, Reynolds Consumer Products an edge. Inc.
Robust brand, which has added capacity to meet growing demand.
There are several factors that companies take into account when deciding on price. A key determinant: whether rivals are likely to follow suit. Company executives say rising costs across all areas of labor, shipping, and raw materials give them confidence that they won’t be cut by competitors.
Technology and artificial intelligence allow retailers to set prices in more targeted ways. For example, they know which buyers are buying only on sale and can therefore offer them discounts. Buyers who tend to buy at full price will not benefit from the discount.
A price increase by a manufacturer may not be immediately obvious to consumers.
Often times, companies can increase prices by reducing the size of packages or reducing offerings rather than simply increasing a given item.
Retailers do not always pass increases on to consumers. America’s biggest grocers say they’ve shielded consumers from price hikes, but that is starting to change. Kroger Co.
and Albertsons ACI 4.44%
Cos. both said they would start passing more costs on to buyers in order to protect their own profitability.
“We’re very comfortable with our ability to pass through the increases we’ve seen at this point,” Kroger’s CFO Gary Millerchip said on a recent call with analysts. “And we would expect that to continue to be the case.”
—Drew FitzGerald contributed to this article.
Write to Sharon Terlep at [email protected]
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