Price Hikes, Sagging Confidence Hurt Package-Goods Volume

Private Label Rises, but Impact on Brands Won't Be as Bad as Two Years Ago

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After more than a year of decline, within the past two months marketers just began raising prices in household and personal products to offset higher commodity costs, according to Nielsen Co. data from Sanford C. Bernstein. But now, the weak economy and falling consumer confidence are reversing what had been a fairly steady improvement in volume since May 2010, leaving the door open for private label.

For the four weeks ended Aug. 6, prices in the household and personal products sector rose 1.9% and volume fell 0.7%, according to Bernstein. Meanwhile, private-label market shares started to pick up again in the past two months, breaking out of a fairly flat performance for more than a year.

Household and personal care category sales

Four-week period Price change Volume change Private label share
1/22 /11 -0.7% +1.2% 14.3%
2/19/11 -0.5% +1.2% 14.1%
3/19/11 -0.5% +0.8% 14.1%
4/16/11 -0.3% +1.0% 14.3%
5/14/11 flat flat 14.2%
6/11/11 +0.2% +2.5% 14.4%
7/9/11 +1.3% +0.5% 14.7%
8/6/11 +1.9% -0.7% 14.7%

Source: Sanford C. Bernstein, Nielsen Co.

Many of the price hikes still haven't shown up, said Sanford C. Bernstein analyst Ali Dibadj, with the increases so far largely reflecting reductions in trade promotion rather than the list-price increases starting to take effect this quarter.

One worrisome sign: Household and personal-care category volume is falling more sharply in response to smaller price increases lately than during the last wave of price hikes in 2009. Deutsche Bank, using a somewhat different category mix than Bernstein and SymphonyIRI data, found volume actually rose a modest 0.3% on a 9% price increase for the full year of 2009. But for the four weeks ended Aug. 7 of this year, its data shows volume off 0.7% on only a 3.4% price increase.

In food, where price increases started taking hold earlier this year, it's a similar story. Volume has been negative for four of the past five months, according to Bernstein's Nielsen data. And private-label shares, which unlike household and personal care never stopped growing in food, started picking up at a faster pace in the four weeks ended Aug. 6. As prices went up 6.3% in the period, volume declined 3.5%.

The risk is that if consumers buy a lot fewer branded goods, or private-label gains too much share, marketers will be forced to roll back price increases or spend more on promotion to bring down effective prices, slicing into profits and marketing budgets.

So far, not all branded players are automatically following price hikes. Church & Dwight Co. recently said Henkel hasn't followed other players yet in laundry detergent price increases, according to Bernstein analyst Ali Dibadj.

Some analysts see signs that the impact might not be as bad as expected nor threaten brand health nearly as much as a similar period in the depths of the Great Recession two years ago. Among the glass-half-full arguments are that overall category sales are still up lately, thanks to the price hikes, even if unit volumes have fallen. And volume declines tend to come mostly in the early stages of price hikes as consumers draw down inventories. That can't last forever with staple items, and consumer pantry inventories are already smaller than two or three years ago because of the recession.

Private-label price hikes also tend to lag those of brands, leading to temporary but unsustainable private-label share gains, said UBS Securities analyst Nik Modi.

Even with a double-dip recession, it's unlikely a second dip will be as severe as the first, when unemployment rates doubled and price hikes were steeper, he said. And he believes retailers -- particularly Walmart -- that didn't get the sales lift they wanted by heavily promoting private label two years ago are unlikely to go that route again.

Mr. Modi also noted that commodity costs, particularly oil, have moderated in recent weeks, giving marketers wiggle room to deal back price hikes in the form of discounts if needed. "There were a few lessons manufacturers learned the last time. One is don't stop innovating, just because the consumer is under pressure," he said. He also doubts marketers will slash marketing spending as many did last time, including P&G.

"You might actually see companies choose to miss near-term earnings to maintain spending levels," he said, "because they know it's not going to put them in a good place a year or two later."

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