Who says inflation is bad? Rising prices are helping some consumer giants deliver their strongest growth in years.
But look a little farther ahead, and this could be as good as it gets for them for a while.
Inflation in everything from coffee to packaging is accelerating. Ultimately, it's shoppers who will have to pay. And when further price increases are passed along to them, there's a strong chance they will rein in their purchases of big brands and flock to value retailers, such as dollar stores in the US and the German discounters Aldi and Lidl in Europe.
Right now, large manufacturers such Nestle SA, Unilever Plc, Procter & Gamble Company and Danone SA are in a sweet spot. Nestle, for example, lifted its forecast for underlying sales growth this year to 6%-7%, its highest rate of annual expansion for a decade, as it enjoyed a resurgence in sales of bottled water (as some people ate out again) and sales of Starbucks coffee capsules (as others stayed home).
Although these giants have begun to raise prices, it hasn't really affected the amount of goods they sell so far. At Unilever, for instance, while sales volumes fell by 1.5% in its third quarter, 1 percentage point of this was from disruption to its businesses in southeast Asia from Covid-19 outbreaks and restrictions.
The trouble is, the pressures on costs show no signs of abating. Manufacturers are already battling supply chain snarl-ups — getting their products on shelves is hard enough given congested ports and labour shortages. The commodities they need to make their products — from palm oil and milk to aluminium — are also becoming more expensive. Unilever warned that inflation could be higher next year than in 2021, although Chief Executive Officer Alan Jope said it would peak in the first half of 2022. That could prove optimistic.
Either way, it means more of these costs will have to be passed onto retailers, and ultimately shoppers. This is already happening somewhat, but there will be more to come. In Europe, price negotiations between manufacturers and grocers are under way and will continue into the first quarter of next year. Consumer groups will try to pass on their extra costs, as well as those they expect in 2022.
The manufacturers do have levers they can pull to ease the pain, including slashing their own operating costs. They can also work with retailers to cut the amount of their products that are sold on promotion, and they can alter pack sizes, so that prices stay the same even though there is less chocolate or cereal in packages. (This is known in the business as "shrinkflation.") But if these re-engineering attempts fail, then ticket prices must rise.
That's not all bad. Moderate, consistent inflation gets consumers used to price increases. So if some hikes will help cover soaring costs, why not lift some others to defend margins?
The danger comes when prices have to rise more than consumers are willing to pay. That could see people trade down to cheaper private-label products in supermarkets and discount retailers. Of course, if inflationary pressures grow more severe, the generic brands will have to increase prices too. It's also worth noting that most of what the big consumer groups sell — aside from premium skincare and beauty — are low-ticket staple items. That should keep them in shopping baskets, even if they cost a bit more.
Still, some people will change their habits, which could eat away at companies' gains. Add in a slowdown in pandemic-fueled categories, such as coffee to brew at home, and sales volumes could slip.
Right now, consumers are pretty much carrying on as before. Many still have cash leftover from pandemic savings. They're also keen to have a very merry Christmas, having missed out on celebrations last year. That's good news for sales of personalised tins of Nestle's Quality Street sweets.
But 2022 looks trickier on both sides of the Atlantic. Higher fuel bills and a fading boost from stimulus payments could weigh on people's spending. More expensive borrowing costs are another worry.
The consumer giants should make the most of their current good fortune while they can.
Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.
Disclaimer: This article first appeared on Bloomberg and is published by a special syndication arrangement.