It’s official: Americans are paying up for their favorite goods.
Consumers clearly aren’t balking at having to pay more for their groceries. In fact, P&G said that so far, they were reacting to price increases more favorably than in the past. Instead of pulling in the purse strings, consumers are trading up. For example, in its Oral-B business, more Americans are opting for more expensive teeth whitening options. In diapers, more parents are choosing premium ranges.
Of course, P&G is in the lucky position of having a suite of household name-brands, many of which are used daily for health, hygiene and cleaning. But the fact that sales are up alongside inflation is encouraging for other consumer-goods groups — particularly rivals Unilever Plc, Nestle SA and Colgate-Palmolive Co. — as well as retailers such as Walmart Inc. and Target Corp.
I’ve noted before that a little inflation is good for manufacturers and retailers alike. The value of sales expands, and consumers get used to paying more at the check-out counter.
However, it’s a problem when price rises grow rampant. And we probably haven’t seen the last of grocery price hikes, even with manufacturers putting in place their own cost-cutting programs. The majority of the increases P&G announced hasn’t taken effect yet. That partly explains why its gross margin fell by 4 percentage points in the second quarter.
What’s more, up until now, many consumers’ incomes have been bolstered by pandemic savings and stimulus payments. That cushion is deflating fast. Add in the likely prospect of higher borrowing costs, and household spending power may be squeezed.
Amid the collision between price hikes and stretched budgets, consumers may be tempted to trade down from P&G’s products to cheaper private labels. Alternatively, they could turn to the German discounters, Aldi and Lidl, which are expanding across the U.S. and sell far fewer big brands than mainstream supermarkets.
That hasn’t happened yet. But consumer goods groups can’t take shoppers’ recent penchant for paying up for granted.
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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.
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