Consumers are still spending on McDonalds Corp. hamburgers, Nestlé SA coffee creamer and Kimberly-Clark Corp.’s Huggies diapers even as prices for those products rise, helping boost sales for some of the biggest companies in the US and Europe.
(Bloomberg) — Consumers are still spending on McDonalds Corp. hamburgers, Nestlé SA coffee creamer and Kimberly-Clark Corp.’s Huggies diapers even as prices for those products rise, helping boost sales for some of the biggest companies in the US and Europe.
Shoppers have remained willing to shoulder higher prices for certain goods even as retail sales more broadly have declined. Yet there are questions about how resilient consumers will remain in the coming months, as central banks continue to raise interest rates and concern grows that a slowing economy could lead to more job losses.
“The consumer is under a significant amount of strain, increasingly,” Erin Lash, an analyst for Morningstar, said in an interview. “But there’s also the factor that consumers are willing to pay up for products when they see the added value.”
Loyalty to well-known brands has helped some companies weather a decline in overall unit sales. Kimberly-Clark reported a drop in the volume of products sold in the first quarter, but the company boosted its profit outlook for the year as consumers continued to seek its Scott paper products. Nestlé, maker of Coffee-Mate creamers and Purina petfood, said its first-quarter results beat expectations despite a slight drop in volumes, as it put in place price hikes of nearly 10% from a year earlier.
Consumer-goods executives say that a predictable cycle tends to follow price increases: Volumes will fall when prices first go up, but then slowly stabilize as costlier toothpaste, disinfectant and burgers become the new normal. Lately, a dip in energy prices has helped lessen overall inflation pressure, which has aided shoppers in adjusting to higher prices for other goods.
Consumer spending is crucial to the overall health of the economy, and policymakers around the world have been watching for signs that inflation — and efforts to tamp it down with higher interest rates — is causing shoppers to pull back. A still-healthy job market in the US and rising stock values have likely helped lessen the impact of broadly rising prices on purchases.
Procter & Gamble Co. Chief Financial Officer Andre Schulten said on a conference call last week that while there was continued “volatility in the macro and consumer environment” US consumers are “holding up well.”
Still, there is wider concern that the outlook is beginning to shift. McDonalds warned Tuesday that it sees the potential for a “mild recession in the US” after its strong start to the year. The burger chain is seeing diners buy fewer items per transaction, Chief Executive Officer Chris Kempczinski said on a call with analysts. Similarly, some buyers of P&G products are opting for smaller product sizes that cost less, while others who can afford it are buying larger sizes to pay less per use, Schulten said in an interview.
In Europe, consumers are shifting to private-label goods at a faster clip than in the US, P&G said. Many store brands are delaying price hikes to attract shoppers, according to Schulten. That’s making the price difference between branded goods and private label bigger.
“Europe continues to be a high-pressure environment,” Schulten said.
Executives are still on high alert for the rest of the year, with continued inflation in some raw materials such as ammonium and sugar raising the prospect that companies will once again raise prices after several said further hikes were on pause.
“We sort of hoped that we would start to see some moving down of inflation,” said Carol Robert, chief operating officer of Suntory Beverage & Food in Great Britain and Ireland. “It’s still extremely high. And we are still facing extreme levels of commodity costs for this fiscal year. So we have sort of hoped to see a trending down, which at the moment we are not yet seeing.”
–With assistance from Dasha Afanasieva.
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