Archived article

Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.

Consumer goods groups and retailers are raising prices but there’s a limit to the number of hikes cash-strapped shoppers can stomach
Thursday 28 Apr 2022 Author: James Crux

Soft drinks giant Coca-Cola’s (KO:NYSE) first quarter results (25 Apr) topped Wall Street expectations as consumers gulped down more of its namesake brand as well as Powerade and Costa Coffee as the world continued to reopen.

But the beat was also driven by higher prices, with Coca-Cola’s sales performance including 7% growth in price and product mix.

Coca-Cola is well known for its brand strength which should enable it to hike the cost of a can without people losing appetite for the product.

However, rising input costs are adding to margin pressures for consumer-facing firms across the board.

And many are, like Coca-Cola, having to raise prices in order to mitigate the impact. Recent forecast-busting third quarter earnings from Procter & Gamble (PG:NYSE) were boosted by price hikes to offset inflation, while food giant Nestle (NESN:SWX) raised prices by 5.2% in the first three months of 2022 and has warned rising costs will necessitate further increases over the course of the year.

Associated British Foods’ (ABF) budget clothing chain Primark is also set to implement ‘selective price increases across some of the autumn/winter stock’ to mitigate soaring costs, though ABF stressed it is ‘committed to ensuring our price leadership and everyday affordability, especially in this environment of greater economic uncertainty’.

Consumer facing firms, particularly those known for bargain prices, have to strike a balance between protecting margins and ensuring cash-strapped customers can afford their products. And ABF appears to be striking that balance, acknowledging that margins in the second half of its financial year will be lower than anticipated.

In the UK, shopper confidence has plummeted to record lows according to the latest Shopper Confidence Index from IGD Shoppervista, with March’s Index score falling from -18 in February to -23.

The latest consumer confidence survey from GfK showed the overall index hitting a multi-year low of -38 points, while the March retail sales figures from the ONS (office for National Statistics) showed retail sales volumes falling by 1.4% between February and March.

Morgan Stanley points to three reasons why the months ahead could get more challenging for consumer staples in particular.

Input costs are expected to stay elevated for longer, income constrained and emerging market consumers face ‘amplified headwinds’ in the form of rising food and energy costs, while downtrading risk is rising, particularly for food and home care companies.

Investors should monitor earnings updates to see which consumer-facing companies have been able to hike prices successfully without alienating their customers.

Toothpaste titan Colgate-Palmolive (CL:NYSE) is set to issue figures on 29 April, Starbucks (SBUX:NASDAQ) (3 May) and Walmart (WMT:NYSE) to follow (17 May).

‹ Previous2022-04-28Next ›