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10th May 2022

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Line chart of Malaysian palm oil futures (M$ per tonne) showing Palm oil prices soar

Some of the world’s biggest consumer goods makers are pushing up prices for branded goods, from nappies to veggie burgers, testing their ability to pass on higher input costs to households.

Nestlé, Procter & Gamble and Unilever are among the global groups to have set out plans for price rises in their latest market updates following commodity price jumps and a spike in transport and packaging costs.

“We are seeing some of the highest commodity price inflation that we’ve seen in a decade,” Graeme Pitkethly, chief financial officer at Unilever, told reporters this week. 

Mark Schneider, chief executive of Nestlé, said last week: “This is a very volatile environment right now, very low visibility, lots of surprises happening. We will take pricing action.”

While Nestlé, Unilever, Reckitt Benckiser and rivals said they had raised prices in the first quarter, most said the bulk of the cost increases — some of which were hedged in the short term — had yet to pass through to consumers’ shopping baskets.

Raising prices first means getting disproportionately punished

As hedging contracts expire and brands negotiate with retailers, that will change, said Will Hayllar, global managing partner at strategy consultants OC&C.

In the US, Procter & Gamble and Kimberly-Clark have announced “mid to high single-digit” price increases starting later in the year, covering essentials such as nappies and toilet paper.

“Generally, the experience when rapid price inflation hits the consumer goods industry is that there is some compression in margins for a year or so, and then most gets passed through to the consumer,” Hayllar said.

Bruno Monteyne, analyst at Bernstein, said powerful brands in premium or growing segments of the market would quickly get more expensive, while “those with weak brands in highly commoditised categories find it hard to differentiate themselves from private label and me-too brands.

“They will find it tough to pass on cost inflation; raising prices first means getting disproportionately punished,” he said.

Raw materials prices have reached multiyear or record highs thanks to factors including the impact of the pandemic on labour and logistics, countries such as China building up their inventories, and bad weather. 

Palm oil, used in food and consumer goods from pizza and chocolate to lipstick and shampoo, has surged to levels not seen since 2008 following a migrant labour shortage. Other vegetable oils are rising in price because of Chinese demand and the growth of biofuels. Dairy and grain have been affected; in Europe, milk prices have risen roughly 50 per cent since the start of the year. 


Jump in milk prices in Europe this year

Packaging costs have jumped almost 40 per cent since the start of 2020 amid intense demand, said commodities data group Mintec. Its global packaging index is at a record high on the back of sharp rises in paper and pulp, plastic and metals costs.

Commodity market tightness is expected to continue through 2021, while Pitkethly said he expected the growth in Unilever’s input costs to accelerate in the second half.

Companies will try to offset some cost rises by other means. François-Xavier Roger, chief financial officer at Nestlé, said the group would look to “productivity gains, industrial efficiencies and product mix and innovation”. But he said “the main way to address input cost inflation is through price increases”.

Richard Cook, head of the analytics product team at NielsenIQ, said “essential categories” such as wheat, eggs, cheese, bread and first aid products would easily be able to increase prices. At the other end of the scale, premium products — or those serving specific needs, such as cakes and skin tanning lotions — could also bear increases.

Line chart of Mintec Global Packaging Index ($/Mt) showing Packaging material prices are at historic highs

Those that enable the consumer to make a statement about themselves, such as vegan products and make-up, can also do so, said Monteyne. “Brands are a way of taxing your emotions. The more we care about categories, the more we buy there.”

He said “weaker” portfolios included Danone’s bottled water business and dairy products, and Unilever’s food portfolio, which could be vulnerable to losing market share if prices are increased too quickly. “What has Danone really done to innovate and make yoghurt more exciting?” he asked.

Products in growing areas such as petcare will have little trouble raising prices, said Monteyne, while there are some “great brands in bad categories” — Beyond Meat within the broader, more commoditised field of packaged food, or Nespresso in coffee — with strong pricing power.

Alcohol and “indulgent” products, such as chocolate and snacks, look vulnerable, said Cook; “price uplift is very likely to lead to decrease in demand,” he said.

Such products may opt for “shrinkflation”, reducing portion sizes while keeping prices the same, said Hayllar. They may also start by changing promotional deals on offer, rather than adjusting list prices.

The unequal impact of the pandemic will affect how households respond, said Hayllar. “The last real wave of commodity inflation was in 2012, and that added to price sensitivity in the marketplace,” he said. “[But] this time there is a segment of consumers for whom there is pent-up spending power.”

Not all companies will take the same approach. Roger, of Nestlé, said that “globally, our strategy is to offset whatever we receive through pricing”. But Unilever said it would seek to avoid this.

“We operate in very competitive markets,” said Pitkethly. “And therefore pricing becomes our tool of last resort, not our tool of first resort.”

2021-05-01 04:00:38

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