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Economic divide influences consumer goods market strategies

As inflation impacts lower-income households, consumer goods companies adapted with a mix of promotions and premiumization to navigate a bifurcated market

Sellers of everyday consumer goods are facing a widening divide among their customers, influenced by economic disparities. Higher-income consumers continue to spend freely, while those with lower incomes struggle with the impact of prolonged inflation.

“There’s certainly been much more bifurcation of the market, and it’s been creeping up over time. I wouldn’t say it’s been a sudden change”, said Bank of America analyst Anna Lizzul. She noted that companies serving lower-income consumers have repeatedly highlighted this trend over the past year.

Recently, this divide has become more pronounced. Packaged-food companies are reintroducing discounts and promotions after years of price increases, a move that has concerned investors. General Mills announced it would increase coupon offerings in the current fiscal year, signaling a return to pre-Covid promotion levels. This announcement led to a 4.8% drop in the company’s stock.

Conversely, companies targeting affluent households are focused on premiumization, continuously improving and innovating their products to justify higher prices. Procter & Gamble, known for its premium products like Gillette razors and Bounty paper towels, remains committed to this strategy. “The consumer within our categories, the consumer that represents our consumption base is actually holding up very well”, stated P&G chief financial officer Andre Schulten in June.

Most consumer-staples companies cater to various income levels. General Mills offers both organic Annie’s mac and cheese and high-end Blue Buffalo pet food. Similarly, Kimberly-Clark competes with P&G at the high end while also providing value-tier brands like Scott toilet paper and paper towels. “The premium tier of products continues to grow very, very robustly”, said Kimberly-Clark chief executive Michael Hsu. However, he acknowledged that middle-to-lower-income households appear increasingly stretched. “The growth driver for us over the long term is by making products better, premiumizing, elevating our categories. But we want to serve the value-oriented consumer as well”, Hsu added.

Clorox, in contrast, is more exposed to low-income consumers due to its product categories, such as cleansers, which face significant competition from private-label goods. “The company is returning to pre-Covid levels of promotion to support a return to volume growth”, Lizzul noted. While much of Clorox’s promotion spending will go toward displays and discounts, it is expected to impact pricing and sales mix in the short term. Many other companies in the household-goods sector are choosing to invest in marketing and brand development rather than discounts.

Despite these challenges, lower-income American households are, on average, better off than before the pandemic, even considering inflation. Goldman Sachs predicts a 1.8% increase in real, inflation-adjusted incomes for the bottom 20% this year, compared to a 2.7% rise for the top 20%. However, cash reserves built up during the pandemic have dwindled, with only 63% of Americans reporting they have enough cash to cover an unexpected US$400 expense in 2023, down from 68% in 2021, according to Federal Reserve surveys.

Premiumization remains a key growth strategy for consumer-staples companies. For example, diaper sales growth is tied to birth rates, but improving product quality and increasing prices drive revenue growth. However, when lower-income consumers are under pressure, this long-term strategy may conflict with immediate needs, leading companies to occasionally reduce prices despite their preference for marketing and innovation investments.

Source
MSN
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