· 5 min read
They say “what goes up must come down,” but as CPG prices continue to climb, it seems like it’ll take more than gravity to drag them back to Earth.
Over the past few years, prices have soared as companies passed on inflated supply-chain expenses from the pandemic and the war in Ukraine to consumers. January’s Consumer Price Index revealed a 0.5% price jump in January, with food at home prices up 0.8% month over month and 11.3% year over year. Other CPG categories didn't fare much better. Personal care products, for example, were up 7.1% for the year and 0.3% for the month.
- Procter & Gamble just raised prices again last month, and Coca-Cola said it also planned more hikes this year. Unilever CEO Alan Jope noted to CNBC that the company was “past peak inflation but not yet at peak pricing.”
While some persist, many supply-chain issues have begun to ease, and several companies that have raised prices are also touting strong earnings. On its fourth quarter earnings call, Mondelez CEO Dirk Van de Put said the company saw a “record year” in profit dollar growth. General Mills last month raised its profit forecasts, while Kellogg reported a 12% year over year sales increase for Q4.
Despite this, shoppers are still faced with elevated prices, and even some retailers are getting frustrated. So how and when will prices finally come back down to Earth?
Need or greed: Justin Cook, US consumer products research leader at Deloitte, noted that many CPGs are still struggling with high input costs from energy to labor, but even as those ease, “prices go up faster than they come down.”
“We can still see some price increases as some of these CPGs are playing catch-up,” Cook said. “That will lead to some periods where some of the rising prices may coincide with some rising profits.”
Still, few if any CPG companies have shared plans to lower prices, and some are questioning their motives. A Deloitte survey last year found that 60% of US consumers thought companies were raising prices more than necessary to boost profits.
- In August, the Commerce Department published figures that showed that US profit margins are the largest they’ve been since 1950, stoking questions about price-gouging.
Chris Becker, senior economist at economic policy group Groundwork Collaborative, said supply-chain issues have given companies “a lot of power to raise prices almost at will,” leading to growing profits.
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“We’re just in an environment where we have really unconstrained corporations, and really constrained consumers,” Becker said. “The balance of power is so much in the direction of corporations that they can get away with a lot.”
The fairly consistent consumer demand thus far has also given these companies confidence, Dhruv Grewal, professor of marketing, commerce and electronic business at Babson College, told us. “Once you are at a higher price, and your customers are okay with it, and your retail partners are okay with it, it is less of an incentive to want to back down to a lower price,” he noted.
It’ll cost you: CPG companies will lower prices when they start to see a hit to their bottom line, noted Grewal. It’s been harder for consumers to make substitutions in CPG categories that have little competition, Grewal said. It’s also tough for consumers to budget when prices for everything are going up, Becker noted.
“I don’t think that corporations can get away with price increases forever, for most goods, because eventually consumers can actually cut back. It just takes some time,” Becker said. “Eventually, they have that concern that they will start losing that…volume.”
- Some companies like P&G, PepsiCo, and Nestlé, have already seen this, recently reporting volume declines.
- More than 30 million families lost supplemental SNAP benefits enacted during the pandemic on March 1, both Cook and Becker noted, which will further impact volume.
But while some companies “may be willing to let customers migrate, but they can’t afford to let the retail buyers migrate,” Grewal said, so continued pushback from retailers like Whole Foods and Walmart will likely be the driving force in companies reducing prices.
Looking ahead…After over a year of constant increases, it is “possible we’ve hit a peak,” when it comes to prices, Becker said. After raising prices 15.2% last year, Kraft Heinz said it would likely stop increases this year, and Pepsi, with a 16% YoY price increase, recently said the same.
“That doesn’t mean that we’re anywhere close to them coming down to where they should be,” Becker said. “And you never know what's going to happen next. There could be new shocks, new cost increases, or new supply-chain disruptions.”
While Cook said “no one really knows” when prices will go down, Grewal anticipated them “inching down” next year, if (and that’s a big if) it’s “business as usual.”