NEW YORK: Prices on household goods have been rising for months in the United States, souring the national mood but not significantly affecting sales – yet.
Producers of everything from paper towels to soda to mattresses have described consumer behavior as relatively resilient despite broad-based price increases. But just how much further companies can hike prices without facing pushback remains an open question.
Chris Scharff, who works in computer security and lives in New York’s Hudson Valley, is watching the higher prices for gasoline and household items.
“It hasn’t changed my behavior but I’ve been more mindful,” said Scharff who predicts “people will start to cut back, or they’ll go for non-premium” options if prices continue to rise.
Eric Schwartz, who works in publishing, says he will cut back at the margins, drive less frequently, or “eat a little more pasta.”
With inflation at a 40-year peak and little sign of immediate relief, the consumer-driven US economy faces question marks, despite very low unemployment and accelerating wage gains.
Americans have seen a growing wave of price hikes since last year, amid global supply chain snarls and labor shortages, but the increases picked up speed after Russia invaded Ukraine and sanctions on Moscow sent energy costs soaring.
Many observers expect the surge will force shifts in consumer behavior in the months ahead.
“Although inflation has been around for a while, it’s only really now starting to bite in a serious way,” said Neil Saunders, an analyst at GlobalData Retail.
More consumers will cut back as they conclude they “can’t keep coping with all these price increases,” he said.
Limited ‘trade down’ so far
The recent batch of corporate earnings reports have shown some limited evidence of consumer shifts, like cigarette maker Altria which pointed to increases in sales of its value smokes.
McDonald’s too has seen a “little bit of a trade down” among lower-end consumers, said Chris Kempczinski, chief executive of the fast-food chain.
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The hamburger chain increased food prices by about eight percent in the first quarter, and estimates food and paper costs will rise 12-14 percent this year, with labor up 10 percent.
Kempczinski described the US consumer as overall “in good shape,” but said higher prices for gasoline and rent are “why we need to make sure we continue to have value be an important part of our proposition.”
Procter & Gamble, which raised prices in all 10 of its product categories in the United States and plans additional hikes this summer in oral care and feminine care, so far has seen a much smaller-than-expected impact on sales.
Jon Moeller, chief executive of the consumer products giant, said the company beefed up distribution to discount retailers, a shift that could preserve sales as those retailers see an increase in traffic of customers looking for bargains.
So far, “our pricing execution is holding up,” Moeller said. “We’ll have to monitor this closely. Things can change tomorrow.”
At Coca-Cola, executives say they are front-loading price hikes while the economy is healthy, and the increases have yet to weigh on sales.
“Trying to catch up on pricing in a recessionary environment is very hard,” said Chief Executive James Quincey. “And so we have a bias to action.”
Other levers
As consumers tighten their belts, the most likely purchases they jettison will be discretionary items, such as streaming services and some apparel, Saunders said.
“When it comes to things like food, where there’s a lot of inflation, they might buy different things or shop at a different retailer,” he said.
“But the volumes of food purchase don’t really change that much because people still need to eat.”
Companies have other levers available as they seek to protect profits from rising costs.
Saunders notes that retail chain Zara recently stopped providing free return of online orders unless customers go to store.
Other techniques for “camouflaging” increases is to introduce a new product and charge more for it, said Z John Zhang, a marketing professor at Wharton School.
Another common strategy is to reduce the package size but charge the same amount because “consumers are a whole lot more price sensitive than quantity sensitive,” Zhang said.
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