Big brands are raising prices and banking on customer loyalty—but that strategy could backfire
Many big brands don’t seem concerned about passing along price increases to customers in the wake of rapid inflation and supply chain bottlenecks. But perhaps they should be, with many federal stimulus effects fading and rising consumer concerns about higher prices.
Executives at companies like Procter & Gamble, Nestlé, and PepsiCo have increased prices over the past year, but have almost universally said brand loyalty is stronger than ever—implying, if not outright stating, that they’ll weather the inflation just fine.
François-Xavier Roger, Nestlé’s CFO, projected in September that the company’s costs would rise even more in 2022 than they have this year. “We don’t know if this is going to be permanent. We don’t know if this will go even further into 2023. We will have a fairly pragmatic approach, and anyway you know what our strategy is, which is to offset anything that we receive through pricing. So the idea is really to pass it on to the trade and to consumers whenever we receive it.” Last month, Roger confirmed that the impact of inflation on the company’s costs is expected to be around 4% of the cost of goods sold in 2021.
Meanwhile, P&G’s CFO Andre Schulten said on the company’s latest earnings call that customers seemed unfazed by the company’s recent price increases: “For those price increases that have gone into the market in the U.S., most of them became effective middle of September, and we have not seen any material reaction from consumers in terms of volume offtake.”
Pepsi CEO Ramon Laguarta said during the latest earnings call that consumers seem to be looking at pricing a little bit differently than before. “Consumers are shopping faster in-store, and they might be paying less attention to pricing as a decision factor, and they might be giving more relevance to the brands or brands that they feel…closer to…more emotionally attached to, as our brand.”
But experts say brands’ current confidence that consumers will stick with their favorite products as prices continue to climb may be shortsighted. “We’ve got this false sense of security from some of these brands, who are saying we can raise prices and consumers are going to pay it,” says Phil Lempert, an analyst and food trends expert known as the Supermarket Guru.
“Consumers are watching very carefully how much money they’re spending on groceries. They’ve seen the price of groceries go up. It’s continuing to go up. And just because you have a national brand that’s iconic for 100 years doesn’t mean that you can raise prices,” Lempert says.
Over the past year, the consumer price index has risen 6.2%, according to the latest report, on October prices. Food, in particular, has seen major spikes. At-home food costs have risen 5.4%, with prices for meats, poultry, fish, and eggs jumping 11.9%. Beef, in particular, has surged 20.1%, and pork is up 14.1% in October, the largest 12-month increase since December 1990.
Yet this rising inflation comes at a time when the effects of expanded unemployment benefits and stimulus checks are waning. That means the extra money consumers may have had to devote to paying higher costs for their favorite brands is gone, so prices may become paramount again.
The last time consumers’ wallets were significantly impacted was during the Great Recession—and brand loyalty dropped. Only about 40% of brands held on to at least half of their highly loyal customers during the start of the recession between 2007 and 2008.
Despite executives’ confidence, the erosion of brand loyalty may already be underway. More than 80% of shoppers purchased a brand other than what they’d normally buy within the past three months, according to a survey published in September. Lower prices were the primary driver in about 65% of consumers’ decisions, while 51% say availability was the motivator.
Substituting store-brand products for name brands is a popular way for consumers to manage their costs. “As economists we talk a lot about substitution, and the first big food substitution that you see is substituting between brands,” says Michael Swanson, chief agricultural economist at Wells Fargo.
The good news for consumers? “Store brands have gotten better, and they’ve gotten a lot better,” Lempert says.
“Recessions, inflation always bring this reworking of people asking: ‘Oh, okay, what do I really want to do?’ Swanson says. That brings “opportunities for some, challenges for others,” he adds.
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