(CPG Brain) CPG Brands and pricing power: a love affair

 

 



There are many ways to know whether you have a great business on your hands but for us the number one way to know if you have great business is pricing power where, like Marlo from “The Wire ", you can effectively tell consumers that the “price of the brick going up” and consumers may not like it but still buy at higher markups. Pricing power among all the moats identified by legendary investor Warren Buffet is easily the most important as it gives a business the ability to be flexible regardless of the vicissitudes of the economy or FED policy. Whether borne from brand affinity, high product demand or market dominance, CPG Brands spend billions either maintaining or trying to acquire it because without it, the legendary tough CPG business becomes impossible. In times of inflation and rising distribution costs, pricing power is paramount. 





Brands with pricing power in the face of surging production costs, inflation and enduring supply chains issues, brands can raise prices on consumers to the point it has some brands wandering if consumer will switch to cheaper competitors to ease the beating on their pocketbooks but so far that hasn’t happened. 


Public announcements of brands from Procter and Gamble to Coca Cola of price hikes hasn’t yet affected many consumers staples outfits bottom line as they pass on rising production and distribution costs. Consumers so far have taken these hikes in their stride but one wonders how long can consumer’s pocketbook continue to take a beating. Research suggests as long as it takes for covid –19 and inflation to ease and current supply chain disruption to smooth out. 


However not all CPG brands have the pricing power of a Coca Cola or Hersheys and have to get creative to make ends meet. Some faced with the choice of raising prices on consumers or let inflation eat into their margins have chosen neither and sought to ship their product in smaller portions in order to maintain their margins and move more product which is smart given explosion in distribution costs and solid consumer demand. This play hasn’t gone unnoticed by consumers (us included) but given the shortage, consumers will take what they can get. 


For retailers, passing costs aren’t so simple as they’re forced to compete with discounters and keep prices low to stop consumers shopping elsewhere. With that in mind it’s no surprise why Walmart has been doing the opposite of brands and rolling back prices in response to supplier hikes with its CFO reiterating the company’s commitment to being a “price leader”. Walmart has long been deflationary force in the economy and with rising inflation rates, Walmart price dominance in likely to remain intact. 


With all this, it’s no surprise consumer staples were among the few categories that fared well during the recent market sell off (disclaimer: we own Mondelez and Keurig Dr Pepper) as price hikes have so far been accretive to CPG brands top and bottom lines. However, how long this state of affairs will last is question that can only answered in time (or a FED meeting). 


In sum, inflation for the most part has been good for CPG brands but if price hikes persists the good (?) times for brands could screech to a halt, fast.     

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