Consumers goods groups face retailers’ resistance over higher prices

After stomaching some of the steepest price rises in decades on everyday goods from bread to toilet roll, shoppers are beginning to balk.

Sales volumes at several of the world’s largest suppliers of consumer packaged goods have proved unexpectedly resilient, helping them to offset a historic upswing in commodity prices and shore up profitability.

Recently published earnings reports showed profit margins expanded last quarter at companies including Kimberly-Clark, home to brands such as Kleenex and Huggies, cleaning product maker Clorox, and Procter & Gamble, the world’s largest household goods group.

But as they attempt to restore margins to pre-pandemic levels, consumer goods companies are encountering resistance. Some powerful supermarket chains, which typically operate on thinner margins, are increasingly unwilling to accept their pricing demands, people with knowledge of some of the negotiations said.

Until recently, suppliers had been able to “pass on price increases because the input costs justified it”, said Ken Harris, a consumer products consultant at Cadent Consulting. Retailers “pretty much acknowledged that it was legit”.

So great were the increases in the cost of commodities, energy and shipping arising from pandemic disruption and Russia’s invasion of Ukraine that “however much they [retailers] didn’t like it, it was hard to argue against”, said Will Hayllar, partner at strategy consultants OC&C.

Since the start of this year, however, retailers have “pushed back and said ‘No’”, Harris said. Consumers were also “starting to say that they don’t think the price increases are justified”.

Ken Murphy, chief executive of Tesco, recently said that while the UK’s largest retailer recognised its suppliers were facing rising costs, it was not afraid to have “direct conversations” with them about securing better terms for shoppers. Food company Kraft Heinz last summer halted supplies of some products to Tesco in a dispute over pricing that has since been resolved.

Simon Roberts, chief executive of rival Sainsbury’s, insisted he was “absolutely determined to battle inflation for our customers”. The grocer’s operating profit margins fell from 3.4 per cent to 2.99 per cent last year as it tried to mitigate rising costs.

In pushing consumer goods groups for more favourable terms, retailers can point to a sharp reduction in some input costs. Vegetable oil prices have almost halved from a year ago, according to UN data. Polyethylene, widely used in packaging, is down about a third, according to commodity analytics company ICIS.

As a result, Hayllar said, “we are getting to a point where those negotiations [between retailers and suppliers] are going to be more difficult”.

The relief from lower input costs is far from universal, however. Steve Voskuil, chief financial officer at the chocolate company Hershey, recently told analysts that prices of cocoa and sugar were “moving in the wrong direction”. Sugar prices are up 23 per cent in the past year, according to the UN data.

“Commodities are a bit of a mixed bag,” said Jeff Carr, finance director at Reckitt Benckiser, although he added that overall cost inflation for the UK-based maker of Clearasil skin cream and Cillit Bang cleaner was “much more manageable” this year than last.

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The consumer goods groups have also turned to efficiency savings to support margins, although their contribution to profits is small compared with the price rises some companies have pushed through.

Price rises of 10 per cent on average in the first three months of the year boosted gross margins at P&G, maker of Gillette razors and Head & Shoulders shampoo, by more than twice the amount of its cost-saving initiatives.

Industry executives have brushed aside the notion that they have exploited inflation to fatten profits. Most large consumer packaged goods groups, including P&G, are still operating on tighter margins than they were before the pandemic.

Clorox’s price rises, which chief executive Linda Rendle said were “cost-justified”, helped bump its gross margin in the first quarter to 41.8 per cent from 35.9 per cent a year earlier, but it was still lower than the 43.4 per cent achieved in 2019.

Given persistent cost pressures, not all companies in the sector became more profitable last quarter. Colgate-Palmolive’s gross margin narrowed from 58.5 per cent a year ago to 56.9 per cent, although chief financial officer Stanley Sutula predicted it would improve in the months ahead.

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Even if such figures suggest that inflation has not benefited such companies, supermarket executives are concerned not only that shoppers are increasingly unable to cope with ever higher prices at the checkout, but that it is retailers who are being held responsible.

A survey earlier this year by dunnhumby, a data analytics group, found US consumers believed grocery retailers’ net profit margins were 14 times higher than they actually are.

Retailers were pushing back against suppliers’ attempts to raise prices “‘so that you can pad your margins’, while the consumers are telling us that it’s our fault”, said Harris of Cadent Consulting.

So far, executives said, resistance to price increases has been more pronounced from shoppers and retailers in Europe than in the US. Household finances are under greater strain in Europe, where shoppers also have more options to defect from branded goods to cheaper versions of the same products developed by retailers.

Sales volumes last quarter at Unilever, the UK-based maker of Dove soap and Ben & Jerry’s ice cream, fell 3 per cent in Europe but were up 0.6 per cent in the Americas, despite similar price increases in both regions.

Graeme Pitkethly, finance director, said European consumers were “under pressure” and there had been some “trading down” to supermarkets’ own, so-called private label, goods in some categories such as bleach.

Yet in the US too there are some signs that consumers are increasingly reluctant to keep paying up for ever more expensive household essentials as the economy stutters.

“We are still seeing some pretty aggressive price increases [in the US] but that’s probably coming to an end,” said retail consultant Jan Rogers Kniffen. “Consumer demand is now starting to slow.”

Michele Buck, chair and chief executive of Pennsylvania-based Hershey, said that while demand for confectionery had been robust, customers were “looking for more affordable options — whether it is the channels in which they’re shopping, private label, deals and increased promotion”.

Some executives cautioned further price rises were on the cards in several categories. Carsten Knobel, chief executive of Henkel, the German-based company behind Persil detergent and Pritt glue stick, said “additional pricing is needed to further compensate for the pressures” from input costs, including wage inflation.

Henkel increased prices 12 per cent on average in the first quarter of 2023, hurting sales volumes, which declined 5.4 per cent.

But as retailers harden their stance — and several input costs begin to fall — most executives said the worst of the pricing pressures for shoppers had probably passed. “Most of the price was taken last year,” said Nicandro Durante, Reckitt’s chief executive. “I don’t see a lot of price rises going forward in 2023.”