Consumer packaged goods companies over-reliant on price hikes

05 March 2024 4 min. read
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2023 saw many consumer goods companies preside over what appeared to be strong revenue growth. But the vast majority of that was simply driven by hiking prices – a tactic which is increasingly unsustainable, amid tumbling consumer spending power.

Almost two years of double-digit inflation led the typical UK household to be £2,300 worse off in real terms, according to research last year. That conservative estimate would wipe out £65 billion from household spending power, drastically impacting the national economy’s potential for growth in the coming years, according to the researchers.

2024 has commenced with a number of upbeat stories around how inflation has slowed to its lowest rate in almost two years. With energy prices finally declining from their opportunistic peak, and supermarkets reigning in price hikes to lure back some shoppers they lost in the last two years, inflation hit 4.2% at the start of the year. That does not represent more money in the pocket of the average consumer, however, with wage growth once again falling long before they can make a dent on the huge losses of the past 24 months.

CP sector retail sales value growth, 2022–23E

Sources: Euromonitor; Bain analysis

In a stark contrast of fortunes, new research from Bain & Company suggests the consumer products sector has enjoyed a year of tremendous growth, with retail sales value (RSV) for the industry globally rising by close to 10% year over year in 2023. That surge, which has preserved profitability across the sector even as inflation has driven up costs in supply chains, is nearly double the 10-year average growth rate.

However, three-quarters of it is likely due to price increases, rather than volume gains. As consumers have found it harder to make ends meet, and reined in spending, companies in the US and Europe have countered this by hiking prices to milk existing customers even more intensely – to the extent that price increases accounted for 95% of RSV growth in those regions.

While this has helped consumer packaged goods companies to preserve their profits before tax through a particularly vulnerable moment, when shareholders have been worried about a possible decrease in dividends, this is not sustainable in the long-run. Having pushed consumers as far as they can, many firms are now concerned that income may begin to fall in the coming months, leaving other cost increases to bite hard.

Emerging markets accounted for most volume growth in 2023

Sources: Euromonitor; Bain analysis

“As inflation slows, a paradox is emerging for consumer companies,” said Richard Webster, head of Bain & Company’s global consumer products practice. “While on one hand, prices have risen too much to maintain consumer spending, on the other, they haven’t risen enough to keep up with increasing costs and mounting pressures from retailers. Future growth will require a fundamental reshaping of value propositions, portfolios, and business models.”

Indeed, while China largely defied global trends, with consumer packaged goods there enjoying rapid growth in sales volume, and price increases well under 10%, developed markets such as the UK and US saw virtually no growth in volume, and so resorted to almost 20% upgrades in pricing. Looking ahead, operators in those nations will need to seek out new areas of interest.

One such opportunity could present itself in opening up new operations in emerging markets. If consumer packaged goods companies can “flex their muscles” there, Bain’s researchers suggest, there is “the greatest room for volume growth”. To that end, India also provides a key opportunity – with a huge population, and balanced growth of both retail sales value and volume of “nearly 15% since 2022” – aided by “consumers switching from local or unbranded products to bigger, international brands”. This may add further fuel to the proverbial gold-rush already being witnessed, of North American and European firms looking to launch new capabilities there.