Shoppers Feel The Pain As Consumer Giants Pass On Soaring Costs

(Bloomberg) -- The UK’s worst cost of living crisis in a generation should be bad news for companies that make everyday consumer products. Families on tight budgets will be forced to buy less, and to shop around for cheap alternatives. At least that’s the theory.

Yet some of the country’s most prominent consumer giants have surprised markets this week by revealing strong sales and profits -- even after they ramped up their prices. Unilever Plc hiked prices by 11% during the second quarter but is still lifting its forecast for this year’s sales growth. Reckitt Benckiser Group Plc, the maker of Durex condoms and Nurofen painkillers, said its prices climbed nearly 10% in the second quarter. Volumes, nonetheless, were up 2.2%. Haleon Plc, the huge consumer division carved out of GSK Plc, added to the chorus, saying it expects organic revenue to grow as much as 8% this year.

The phenomenon has given investors a pleasant surprise. More than £7 billion ($8.4 billion) was added to the value of these three FTSE giants -- Unilever, Reckitt, and Haleon -- between Tuesday’s open and mid-morning Wednesday.

While the current wave of inflation is global, Brits are suffering steeper price rises than people in many peer countries. As the inflationary crisis intensifies, it is clear that, at least for now, consumers are the ones taking most of the pain.

Price hikes are appearing in the least expected of places too. McDonald’s Corp said Wednesday that it is lifting the cost of a basic cheeseburger above £1 for the first time ever in Britain, as it grapples with escalating energy and food costs. An Amazon Prime subscription is becoming 31% more expensive, on average across the tech company’s European markets. 

The squeeze on consumer wallets is being felt beyond the UK and in various corners of the consumer market. Well-heeled shoppers are having to swallow higher prices at Mercedes-Benz AG and luxury fashion brand LVMH.  

Feeling the Pinch

For now, many companies appear to be shielded from the consequences of a generational rise in inflation. The question is how long can consumers continue to bear the brunt. 

“We’re very conscious that the consumer is feeling the pinch in many parts of the world,” said Unilever Chief Executive Officer Alan Jope. He and bosses at Reckitt and Danone say they are not ignorant of the challenges facing their customers and are trying where they can to minimize cost increases. 

Some are cutting back on promotions, as one way of increasing average prices without hitting consumers too hard. Others are changing pack sizes to offer more affordable price points or reducing their ranges to help mitigate costs which are rising in every part of the business from transport and packaging to staff and marketing. 

“We are watching our promotions and whether these add value or not, redirecting our savings elsewhere,” Reckitt Chief Executive Laxman Narasimhan said in a media call. “We think very carefully about pricing and we want to make sure we are doing it responsibly.”

“Really in some ways it’s an art and science with very precise steps we take market by market,” said Danone Chief Executive Officer Antoine de Saint-Affrique. The CEO said his company, the world’s largest yogurt maker, has been lifting prices “extremely fast in the markets where you can.” 

In North America there had already been seven waves of price increases, he added, with some European countries in the midst of a third wave. “We will keep driving prices where we think it is important to protect our business.”

Signs of a Push-Back

The battle over pricing has already led to price spats between large manufacturers and supermarkets with Kraft Heinz Co. recently pausing supply of baked beans and ketchup to Tesco Plc. Britain’s largest grocer said it would not pass on “unjustifiable price increases” to consumers. The companies subsequently reached a compromise.

There are signs that consumers are starting to push back. Unilever said some shoppers are switching away from branded goods with private label manufacturers gaining market share in food, ice-cream and household cleaning products. Tesco recently said it too was seeing some shoppers buy basic store-brand staples, such as pasta. 

Shoppers are already reining in big-ticket spending with Walmart Inc issuing a surprise profit warning Monday saying that American consumers were spurning larger purchases and prioritizing spending on groceries. Back in the UK, Wickes Plc said people were taking longer to make decisions on home improvement projects.

Read More: Shoppers Spend Without Splurging, Clouding US Recession Call

With energy and fuel bills rising further, and shoppers already taking a more cautious approach to discretionary spending, there is still no clear picture on how robust consumer demand will be going forward.  

The good times on pricing may soon come to an end for consumer giants, according to analysts at Morgan Stanley, who said companies need to prepare for potentially weaker demand and down-trading in a response to the sharply rising cost of living and looming risk of a recession. 

“Bullish corporate narratives might not survive the winter,” they said.

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