(CPG Brain) Consumer staples and pricing power: a love affair gone sour?

 

 

“The single most important decision in evaluating a business is pricing power. If you've got the power to raise prices without losing business to a competitor, you've got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you've got a terrible business”. (Warren Buffet) 

  

 

When writers use block quotes like the one above, it’s usually for effect or give lens into what’s to follow or sometime just use someone’s else's word instead of theirs to give their fingers a break (guilty as charged). However, in this case, the block quote from famed investor Warren Buffet pretty much is why wrote article many companies, thanks to rising inflation and supply chain costs, dread: do you have pricing power? 

For many, growth stocks Inflation and threat of interest rates has hit them hard but nothing hits harder than finding out after years growing and establishing a business that you can’t hike prices on your customers by a nickel without seeing churn rates in the 20’s.   

For many players in the space were interested in (consumer staples/CPG) the answer is yes. But with every announced price hike and C-suite public appearance, even the executive level managers of companies with rock solid balance sheets and household names are concerned about the double whammy of rising input costs and the prospect of passing them on to the consumer. So far, consumers of the big CPG firms have bored the brunt of rising inflation despite the hit on their pocketbooks but with other costs from rent to energy (especially), a downsizing on consumer goods might be on the cards.   

Now that downsizing is easier said than done as humans as a species don’t do hunger or dehydration well but at some point, something has to give. Managing inputs for most CPG/consumer staple players means drawing concessions from suppliers who also suffer from rising input costs but with inflation at 30-year highs, such concession may ease costs on consumers but keep in mind their competitors are employing the same tactics. 

2022 is where we find out the strength of brands that have been built over decades and markup consumers are willing to pay over perceived value. Our guess: CPG’s will still fare well despite inflationary pressure as demand for their brands is strong among consumers and they benefit from global scale and well-known brands. This a sidenote but it's pretty important as this should be a tailwind for marketing professionals but with the epidemic of CMO’s getting canned in ever shortening tenures to continue as having no levers during inflation other than a department budget is asking for trouble (price hikes in ad markets notwithstanding). 

With many CPG players like Procter and Gamble and Unilever being regulars on top ten ad spenders' lists, the costs attached to the not so secret of weapon are on the up which means despite how well their brands are known around the world, giving their brands that extra edge in brand equity over a generic store or discount brand could see an uptick which isn’t good news as consumers could switch to cheaper items to ease pressure on their pockets. 

In sum, despite the pressure on CPG/consumer staple brands should fare well as brands have spent decades building global household names building strong loyalty among consumer however, with the rise of input, outbound and now marketing costs. CPG brands may find their pricing power on the wane going forward with evidence we’re already at that tipping point.