Trading up and lower price promotion were possible because of unusual pandemic conditions, said K.K. Davey, president of strategic analytics for IRI, on a recent webcast. People were staying home more, and buying more food and cleaning supplies to use at home. Federal stimulus money made households flush with cash. And because people weren’t spending as much on travel, restaurants, entertainment or sporting events, they had extra money to spend on goods and premium brands, as P&G Chief Operating Officer, now CEO, Jon Moeller noted on several earnings calls in the past year.
All those factors are disappearing just as price hikes are set to take hold. Federal stimulus money is running out, and even the $2 trillion-ish Build Back Better legislation wouldn’t provide the same kind of household budget boost if passed. While hybrid workforces are here to stay, more people will be leaving home to work in offices or seek entertainment as COVID-19 vaccines and treatments lessen the threat, Davey said.
One of the biggest drivers of growth for CPG in the past two years has been low-income households increasing spending, but low-income households will be hit particularly hard by the decline in stimulus money.
IRI research across thousands of products shows that while price elasticity—or how much a price hike results in volume declines—declined markedly in 2020, it began moving back up in 2021 and is likely to increase more in 2022. Davey expects volume across all of consumer packaged goods to decline 1% to 5% next year, while revenue rises 1% to 5% overall thanks to price increases.
Value brands will rule
The inflationary years of the 1970s and ‘80s paved the way for value retailers, notably Walmart. Today, the landscape is dominated by discounters, also including Amazon, Target, Costco and Aldi. Those legacy value retailers haven’t missed the fact they win by holding down prices when others increase them.
“Fighting inflation is in our DNA,” Walmart CEO Doug McMillon noted last month as the giant retailer surprised Wall Street with better-than-expected comparable-store sales increase of 9.2%—even against comparison to pandemic-fueled sales increases a year ago. Walmart did that in part by passing along only a fraction of price increases from suppliers, which helped it gain market share. Rival Target played that game even more successfully, with comps up 9.7%.
Both retailers indicated they plan to continue sacrificing margins to hold down prices. And McMillon made clear Walmart is pressuring suppliers to break ranks and try to gain share by not following competitors’ price hikes.
Clearly, that’s an opportunity for value brands of all sorts. Already, after years of muted growth, private labels and mid-priced “mainstream” brands are picking up sales momentum, according to IRI’s Davey.
Never go naked
So, when brands do raise prices, they’d better be discreet.
“Too many brands are like deer in the headlights,” Stibel said. “They take naked pricing. They render themselves vulnerable. They’re scared to change package sizes.”
But he said smart marketers will use every way they can to avoid noticeable price increases that people will resist. That includes reducing package sizes, launching loyalty programs, offering value packs that offset higher prices, and making noticeable product improvements that could justify a higher price.
Use Subscribe and Save
The 2020s version of the value pack may well be “Subscribe and Save.” It’s not available everywhere. Walmart, for example, doesn’t do it; Target ended it last year; and Amazon offers it only on a limited assortment. But pairing a price hike with a 5% or 15% Subscribe and Save discount on Amazon, or offering a locked-in subscription price for a time, could be a good way to offset the impact of a price hike or differentiate from competitors during inflation, said Sarah Hofstetter, president of global e-commerce analytics firm Profitero and a Campbell Soup Co. board member.
Zig the zag
While many brands are raising prices by shrinking packages and keeping the same price, brands that stand pat or go the other direction have a chance to stand out. Unilever’s Dollar Shave Club did exactly that recently by sending customers an e-mail touting the fact that it increased the size of its body wash to 16 ounces while keeping the price the same. It’s expensive, but it gets noticed, and it’s on point for a value brand like Dollar Shave Club, Stibel noted. Taking a similar tack in an industry where the dollar menu is the primary value play, McDonald’s recently generated considerable social and conventional media coverage by returning the Egg McMuffin to its original price (63 cents) on its 50th anniversary.
Dish out the Hamburger Helper
General Mills may be looking to offload it now, but Hamburger Helper (followed by Tuna Helper, etc.) was once a classic 1970s response to inflation—developed to offset the high cost of ground beef by stretching it. As the brand celebrates its 50th anniversary, it’s a reminder that a new wave of inflation provides marketers with a similar opportunity to offer palatable money-saving solutions.
Talk about it
Little advertising currently addresses inflation, and that’s a mistake, Stibel said. “Most marketers are afraid to talk about inflation. But it’s on people’s minds. Talk about it and capitalize it in your messaging and your packaging. There’s an opportunity for downsizing so people who can’t afford the brand but really want to buy it even in a smaller size can.” Larger sizes and value packs also can encourage people to stock up to avoid future price increases or shortages, he said. About the only ads right now talking about inflation are political. But, while under wraps for now, expect Dollar Shave Club to focus on fighting high razor prices in upcoming work.
Get ready to promote again
The current inflation follows the crypto-inflation of the past 18 months, caused by marketers pulling back on price promotion. But price promotions will be back in 2022, because people are getting more price sensitive, said IRI’s Davey. Brands traditionally try to soften the blow of price hikes by using promotions to deal them back temporarily. And even if that wasn’t part of the plan, it’s likely to happen in back quarters of 2022 as brands watch volume decline when consumers react negatively to price hikes—or positively to competitive promotions.
Don’t screw up the details
One big difference between inflation now and in the 1970s and ‘80s is the digital trail left by e-commerce. If brands take price hikes by reducing package sizes, for example, they need to make sure they change their product descriptions, photos and videos to reflect that, Hofstetter noted. Enterprising trial lawyers might be among the first to notice. “More importantly, you’re going to end up getting a lot of negative reviews,” Hofstetter said. “If you get a lot of negative reviews, you’re going to get deprecated in search results, and people aren’t going to buy your product.”
Give people a reason
As prices rise, people are definitely using e-commerce more often to price compare, Hofstetter said. Yet e-commerce doesn’t always drive down prices, particularly if you give people a reason to ignore them. Nik Modi, managing director at RBC Capital Markets, speaking on the same IRI webinar as Davey, noted that Chipotle has found customers are often less price sensitive when using the restaurant chain's mobile app. One of the more popular products on the Chipotle app is a premium-priced handcrafted cassava that can only be bought online, Modi said. People also can use the app to customize burritos with ingredients only available through the app, he said, paying a 17% premium for that privilege. “These are examples of ways that retailers in the CPG industry can think of ways to charge premium prices to offset some of the margin dilution” of rising costs and online delivery, he said.
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