You can’t go anywhere and not hear about inflation hitting everything from food, to oil, to cars, and furniture. Whether you ultimately believe it’s transitory or not, it’s an interesting time on the pricing front for brands/mfgs.
Prior to Covid, many legacy CPG companies (General Mills, Kraft Heinz, P&G and others) couldn’t raise prices without seeing a significant reduction in sales. They were being pinched by private label and new DTC trailblazers that were usurping share. When Covid hit and demand skyrocketed, they couldn’t keep products on the shelf – and consumers chose to purchase brand names like Lysol and Clorox cleansing wipes because that heritage was trusted at a time of significant uncertainty. Flash forward to today where news headlines suggest many of the largest CPG’s are encountering unprecedented input cost pressure that can’t be fully absorbed and therefore must be passed along to consumers via price increases.
I question how much of this rhetoric is truly due to an increase in costs versus an excuse to finally raise prices and not have retailers (and hopefully customers) balk. Why? Because we haven’t seen as significant price inflation in private label as we have among name brands – further leading to skepticism of the claim being solely attributed to costs. Time will tell if sales suffer as a result, but I would surmise that the ~4% increase in price that many are announcing is at the upper boundary of price elasticity for most of these companies especially as industry experts have pegged 5% as the ceiling. A late September survey of more than 14,000 consumers by market research term Numerator found that 20% said they would switch to cheaper brands if prices continued to rise. Even more recently (December 2021), consumers are trading back to private label as I anticipated. It might surprise many people to know that the largest CPG in the US is not Kellogg, Campbell Soup or even Hershey. At $58b/year it’s Costco’s Kirkland private label. This brand was born during an inflationary period in the 90’s in which a lot of the large CPG’s were aggressively raising prices.
Major retail buyers have historically had a lot of leverage in negotiations with these legacy CPG’s, because they had exciting new DTC brands wanting shelf space in addition to private label – all of which kept the incumbents in check. If you’re a B2C startup trying to get into physical retail, now is the time to be aggressive with pricing to gain share because retailers could supplant these incumbents as they present these higher prices in their upcoming line reviews.