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Some of the world’s largest manufacturers of consumer goods are raising the price of branded goods, from diapers to vegetable burgers, testing their ability to pass on higher entry costs to homes.
Nestlé, Procter & Gamble and Unilever have set plans to raise prices in the latest market updates, following a jump in commodity prices and rising transport and packaging costs.
“We’re seeing the highest commodity price inflation we’ve seen in a decade,” Unilever chief financial officer Graeme Pitkethly told them this week.
Nestlé CEO Mark Schneider said last week: “It’s a very volatile environment right now, very low visibility, a lot of surprises are going on. We’re going to take price measures.”
Although Nestlé, Unilever, Reckitt Benckiser and opponents said prices had risen in the first quarter, most said the biggest cost increases – some of which were covered in the short term – had not yet passed into consumer shopping carts.
As hedging contracts expire and brands negotiate with retailers, that will change, said Will Hayllar, global partner at OC&C strategy consultants.
In the US it has been done by Procter & Gamble and Kimberly-Clark he announced Prices “above the middle of a single number” rise starting later in the year, such as diapers and toilet paper.
“Generally, when rapid price inflation hits the consumer goods industry it tends to be a kind of margin squeeze for a year and then most of it is passed on to the consumer,” Hayllar said.
Bruno Monteyne, an analyst at Bernstein, said that strong brands in premium markets or growing segments would quickly become more expensive, “making it difficult for those with weak brands in highly traded categories to differentiate themselves from private brands and self-markets.
“They will find it difficult to pass on cost inflation; raising prices means punishing them disproportionately, ”he said.
Commodity prices have been multi-year or record, including the impact of the pandemic on labor and logistics, thanks to countries building China’s inventories and bad weather.
Palm oil, used in food and consumer products from pizza and chocolate to lipstick and shampoo, has risen to levels not seen since 2008 due to labor shortages. Other vegetable oils are becoming more expensive due to Chinese demand and the growth of biofuels. They have caused dairy products and grains; In Europe, milk prices have risen by about 50 per cent since the start of the year.
50%
This year in Europe milk prices have jumped
Shipping costs have risen nearly 40 percent since the start of 2020 in strong demand, the Mintec product data group said. The global packaging index is a record due to the rapid rise in the costs of paper and pulp, plastics and metals.
The tightness in the commodity market is expected to continue until 2021, while Pitkethly said he expects Unilever’s entry cost growth to accelerate in the second half.
The company will try to offset some of the cost increases with other avenues. François-Xavier Roger, Nestlé’s chief financial officer, said the group will look at “productivity gains, industrial efficiency and product mix and innovation”. But he said “the main way to deal with input cost inflation is to raise prices.”
Richard Cook, head of NielsenIQ’s analytical products group, said prices would rise easily for “key categories” such as wheat, eggs, cheese, bread and first aid products. At the other end of the scale, great products – or ones that meet specific needs, such as cakes and skin tanning lotions – can also increase.
Those who allow consumers to make statements about themselves, such as vegetable products and makeup, can also do so, Monteyne said. “Brands are a way to tax your emotions. The more we care about the categories, the more we buy into them. “
He said the “weaker” portfolios are Danone’s bottled water business and dairy and Unilever’s food portfolio, if prices rise too quickly could put them at risk of losing market share. “What has Danon really done to innovate and make yogurt more exciting?” he asked.
In areas where products are grown, for example caring for pets it will have little trouble raising prices, Monteyne said, out of “excellent brands in the bad category” – within a wider and more commodified area of food packaged above meat or in Nespresso coffee – with high price potential.
Alcohol and “indulgent” products, such as chocolate and snacks, seem to be weak for Cook; “Price increases are likely to reduce demand,” he said.
Such products can choose to “shrink,” reducing portion sizes while keeping prices the same, Hayllar said. It is also possible to change the promotional offers of the offer, instead of adjusting the list prices.
Hayllar said the unbalanced impact of the pandemic will affect the response of households. “The last real wave of commodity inflation was in 2012, which added to price sensitivity in the market,” he said. “[But] this time there is a consumer segment with strong spending. ”
Not all companies will take the same approach. Roger of Nestlé said that “our strategy globally is to compensate for what we receive through pricing.” But Unilever said it would seek to avoid that.
“We operate in very competitive markets,” Pitkethly said. “And so price becomes the tool of the last resource, not the tool of the first resource.”
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