Consumer-goods makers find they can’t raise prices much more

A customer browses the freezer section at an Iceland Food Ltd. supermarket in Crawley, UK, last fall. UK inflation rose more than expected to a 41-year high of 11.1%, adding to pressure on the Bank of England to raise interest rates again. Bloomberg photo by Jose Sarmento Matos

Inflation-pinched consumers are tired of paying more for food, soap and other branded goods, with European shoppers leading the rebellion.

Companies ranging from Ben & Jerry’s owner Unilever to Lysol maker Reckitt Benckiser have reported declining sales volumes in recent months, with many consumers turning to cheaper private-label goods amid a severe cost-of-living crisis. The problem is most severe in Europe, where supermarket chains are pushing back against lifting prices.

“Europeans are under stress. There is an issue with pricing power,” said Reckitt Chief Executive Officer Nicandro Durante.

Reckitt’s health-related products are often typically recession-proof as they are less frequent purchases and can be considered essential by shoppers. Yet the British company this week reported a 5.8% drop in volumes sold in the final quarter in a decline that can only be partially explained by the group selling less Lysol disinfectant following the pandemic.

It’s a similar story at Unilever. When Hellmann’s mayonnaise maker raised pricing in Europe by 8.3% in 2022, the volume of products Unilever sold there fell by 3.9%. Meanwhile, an even bigger price increase in North America dented volumes by only half as much. Nestlé, Danone and Colgate-Palmolive have also flagged similar issues with weaker consumption in Europe.

“Really, it is quite a step change,” Unilever Chief Financial Officer Graeme Pitkethly said of the shift from deflation to inflation in Europe on a recent call with analysts. “We’ve recently seen share gains by private label in Europe in most categories.”

Makers of household and personal-care products seem more cautious about the runway left for further price increases than their counterparts selling food and beverages, Barclays analysts Lauren Lieberman and Andrew Lazar wrote in a note following the Consumer Analyst Group of New York conference last week.

The waning pricing power of consumer goods makers contrasts with carmakers and airlines, which have been able to push prices up due to limited supply and pent-up demand.

CEOs of companies like Reckitt and Nestlé think inflation has peaked. Yet agricultural supply glitches, the ongoing geopolitical fallout from the Ukraine war and a stronger-than-expected rebound in China could propel further shocks in input costs like logistics or raw materials.

Last week, the U.S. said it would impose a 200% duty on Russian aluminum imports, a move likely to increase prices overall and costs, particularly for drinks makers like Coca-Cola. Outgoing Unilever CEO Alan Jope in January forecast a sudden surge in consumption in China, the world’s second-biggest economy, as it abandoned its Covid Zero policies more quickly than anyone foresaw.

With the makers of toothpaste and mayonnaise facing significant erosion to market share if they keep ramping up prices, finding cost efficiencies becomes ever more important.

“As you might expect as the inflationary cycle wears on, each new pricing decision becomes more difficult,” said Procter & Gamble Chief Financial Officer Andre Schulten. “We do everything we can to offset cost increases with our productivity work to minimize the need for pricing.”

Structural differences in how price rises are negotiated in Europe and the U.S. could have played a role in weaker volumes in the trading bloc. In Europe, suppliers typically negotiate prices with retailers annually while in the U.S. these conversations happen more regularly throughout the year. Danone Deputy CEO Juergen Esser said the yogurt maker suffered volume hits in Europe from costs rising faster than price rises could be negotiated. The company stopped supplying some products because prices couldn’t be agreed on in time.

Talks can also backfire. Heinz temporarily stopped supplying Tesco, Britain’s largest supermarket, with products over a pricing row.

There are some categories that enjoy more resilient demand – notably the petcare units of Nestlé and Colgate, which managed to increase both pricing and unit sales. Yet gross margins at most consumer-goods makers are below 2021 levels, making it likely that they will want to recover some of the profitability they have lost.

Misjudging the plans of competitors also carries heavy penalties in the fiercely-contested sector, says Richard Webster, head of global consumer products practice at consulting firm Bain. “There’s a competitive dynamic between the consumer products companies, because if I raise prices, but my competitor doesn’t, there can be quite a big market share change.”