Consumer Staples: Impact of Elevated Inflation Rates

Pricing Strategies Amid Elevated Inflation

Consumer staples companies are implementing various pricing strategies to navigate elevated inflation. Coca-Cola and Colgate-Palmolive are raising prices in response to intense inflation and raw material costs. Mondelez anticipates customer disruption from annual price negotiations, while Kimberly-Clark and Procter & Gamble balance inflation-led and innovation-led pricing to sustain organic sales growth.

"However, across developing emerging markets there continues to be a handful of markets that are experiencing intense inflation which is driving elevated pricing offset by incremental currency headwinds." --- (KO, earning call, 2024/Q1)

"We continue to expect a high single-digit inflation in 2024. Although the vast majority of pricing has been landed in Europe, we continue to expect some level of customer disruption due to -- associated with our annual price negotiation process." --- (MDLZ, earning call, 2024/Q1)

"We’re able to still get pricing, not just inflationary pricing but we still have pricing going through the categories, particularly in some of the markets where we’ve had more inflationary impact from raw materials - Hill’s would be a good example of that, we took some more pricing in the first quarter." --- (CL, earning call, 2024/Q1)

"And so that's the progress we're making. I think it's great to cycle. We're very glad to have cycled a lot of pricing moves that we had to take to offset inflation." --- (KMB, earning call, 2024/Q2)

"You’re planning embedding in your base guidance, I understand it’s a balanced approach to the organic sales growth for the midpoint at 4%, but wondering if there is any way of mitigating some of the effect in some of these other places which is natural, and therefore we can see some pricing go through inflation led and some pricing also led by innovation." --- (PG, earning call, 2024/Q4)

Cost Management Tactics

Consumer staples companies are employing various cost management tactics to navigate elevated inflation rates. Procter & Gamble is focusing on restructuring and significant annual cost savings. Kimberly-Clark is leveraging strategic pricing, product mix management, and risk management to mitigate input cost volatility. Mondelez International highlights effective cost management as a key driver of robust earnings and cash flow.

"In connection with this announcement, the Company said that it expects to record incremental restructuring charges of $1.0 to 1.5 billion after tax, including foreign currency translation losses to be recognized upon the substantial liquidation of operations in the affected markets." --- (PG, press release, 2024/07/30)

"It focuses on strategic pricing decisions, price pack architecture, managing our product mix, trade promotion activity and trading terms." --- (KMB, sec filing, 2024/Q1)

"We posted solid top-line results coupled with robust earnings and free cash flow generation in #Q1 driven by strong pricing execution, effective cost management and emerging market momentum." --- (MDLZ, twitter, 2024/04/30)

"But I do think that will become a significant contributor to our ability to sustain about $1,500,000,000 in annual cost of goods savings." --- (PG, conference, 2024/05/14)

"We've strengthened our financial position across our cost structure, our cash flow and our balance sheet, including better risk management principles to mitigate input cost volatility." --- (KMB, conference, 2024/06/04)

Changes in Consumer Behavior

Consumers are adapting to elevated inflation by being more cautious with their spending, trading down, and seeking deals. Lower-income consumers are particularly affected, but the worst impacts may be easing. Spending patterns are normalizing, with a shift back to services and entertainment, while retail sales without fuel are increasing.

"While our lower income consumers continue to deal with inflation, higher interest rates, and reduced government benefits, we are encouraged that the worst of the SNAP headwinds appear to be behind us." --- (DLTR, earning call, 2024/Q1)

"So I'm going to maybe start going to John David and saying, everybody always wants to know how our consumers feeling generally out there, Any changes in behavior?" --- (WMT, conference, 2024/06/25)

"In addition, business trends continue to reflect a normalization in spending patterns that first emerged more than 2 years ago, a pattern where consumers are remixing their spending back into services and entertainment outside of their homes after curtailing those activities during the pandemic." --- (TGT, earning call, 2025/Q1)

"Total 2023 adjusted sales decreased in 2023, compared to 2022, by 0.6%. The decrease was primarily due to the decrease in supermarket fuel sales, partially offset by the increase in total sales to retail customers without fuel." --- (KR, sec filing, 2023/Q4)

"Consumers being careful with their spend, trading down, looking for lower ASP products, looking for deals." --- (AMZN, earning call, 2024/Q2)

Supply Chain Disruptions

Consumer staples companies like Procter & Gamble, General Mills, Kimberly-Clark, Coca-Cola, and Mondelez have faced significant supply chain disruptions. While some, like P&G, do not anticipate major disruptions within their guidance, others have documented challenges and are enhancing strategic supplier partnerships and inventory management to mitigate impacts.

"Significant additional currency weakness, commodity cost increases, geopolitical disruptions, major supply chain disruptions, or store closures are not anticipated within the guidance ranges. With that, I’ll hand it back to Jon for his closing thoughts." --- (PG, earning call, 2024/Q4)

"I mean, they had a lot of supply chain disruptions, which are well documented and they've talked about." --- (GIS, conference, 2024/05/29)

"COVID, we navigated through the supply chain disruptions that we faced. We developed capabilities that we still need to enhance around strategic partnerships with suppliers rather than transactional relationship with suppliers." --- (KMB, conference, 2024/05/30)

"These items were partially offset by strong cash operating results, a dividend payment from an equity method investee in Thailand, payments in the prior year resulting from the buildup of inventory to manage potential supply chain disruptions, and $167 million of the $275 million milestone payment for fairlife in the prior year." --- (KO, sec filing, 2024/Q2)

"We continue to take steps to mitigate impacts to our supply chain, operations, technology and assets." --- (MDLZ, sec filing, 2024/Q1)

Impact on Profit Margins

Consumer staples companies are managing profit margins amidst elevated inflation by focusing on profit dollar growth (KMB), leveraging fixed costs internationally (PEP), and seeing increased gross profit margins (CL, KO). However, some anticipate challenges due to rising input costs, like cocoa prices (MDLZ).

"Relative to our power and great care strategy. As a reminder, I mean, as we think about margins, our main focus is on driving profit dollar growth margins for us, as we've stated, our milestones, and we're moving on that progression." --- (KMB, earning call, 2024/Q2)

"We’re obviously seeing a great return on that relative to volume. Encouraging likewise, gross profit percent and gross margin dollars were up in North America, which is allowing us to continue to invest strongly behind the business, and we are encouraged by that particularly as we move in the back half of the year." --- (CL, earning call, 2024/Q2)

"We look at that very carefully. Now why are our margins expanding internationally because as we gain scale and obviously, that our fixed cost leverage is much better, and that's how we're getting to more profitable businesses in international markets, especially the large markets, whilst we keep affordability at the center of our strategy because that's long-term, including other things that we do, obviously, with availability and with innovation." --- (PEP, earning call, 2024/Q1)

"Our gross profit margin increased to 61.8% for the six months ended June 28, 2024, compared to 59.8% for the six months ended June 30, 2023." --- (KO, sec filing, 2024/Q2)

"So, I'm not sure you will continue seeing the type of gross profit dollar expansion and gross margin that you saw in Q1 into the second half because the cocoa prices will hit a little bit harder in -- particularly in Q4." --- (MDLZ, earning call, 2024/Q1)

Consumer Sentiment and Spending Patterns

Elevated inflation rates have led to varied consumer spending patterns, with high-end consumers showing growth (WMT). Companies like Amazon and Costco highlight the challenges in forecasting demand due to fluctuating costs and economic conditions (AMZN, COST). Retailers like Dollar General and Dollar Tree emphasize value through pricing and promotions to counter dampened demand (DG, DLTR).

"In addition, changes in fuel, utility, and food costs, interest rates, and economic outlook may impact customer demand and our ability to forecast consumer spending patterns." --- (AMZN, sec filing, 2024/Q2)

"Consistent spending across income groups. We've had more growth as we mentioned in the earlier remarks, on the high-end consumer." --- (WMT, earning call, 2025/Q1)

"These risks and uncertainties include, but are not limited to, domestic and international economic conditions, including exchange rates, inflation or deflation, the effects of competition and regulation, uncertainties in the financial markets, consumer and small business spending patterns and debt levels, breaches of security or privacy of member or business information, conditions affecting the acquisition, development, ownership or use of real" --- (COST, press release, 2024/07/10)

"So it's pretty much right on what we thought. And I would tell you that for us, here at Dollar General, we've always done a very good job, as you know, of balancing that everyday value here on the shelf, meeting our everyday price and then seeding in that promotional activity to really show even more value to the consumer. We do that probably as good as anyone." --- (DG, earning call, 2025/Q1)

"This dampened consumer demand across our seasonal discretionary assortment, which caters heavily to these types of celebrations." --- (DLTR, earning call, 2024/Q1)

Regulatory and Policy Impacts

Regulatory and policy changes, such as tax reforms and new legal requirements, significantly impact consumer staples companies like Procter & Gamble, Coca-Cola, PepsiCo, and Kimberly-Clark. These changes can affect earnings, increase costs, and necessitate additional investments, while outdated regulatory guidance and new rules, like the FDA's BVO ban, further complicate compliance.

"For example, our net earnings and cash flows could be affected by any future legislative or regulatory changes in U.S. or non-U.S. tax policy, including changes resulting from the current work being led by the OECD/G20 Inclusive Framework focused on "Addressing the Challenges of the Digitalization of the Economy."" --- (PG, sec filing, 2024/Q3)

"It is not enough to abide by various countries' regulatory guidance as these agencies in the EU, Canada and the U. S.For example are often decades behind in reevaluating the health impacts of MSS." --- (KO, event transcript, 2024/05/01)

"These new or increased legal or regulatory requirements, along with initiatives to meet our sustainability goals, could result in significant increased costs and additional investments in facilities and equipment." --- (PEP, sec filing, 2024/Q2)

"“The rule takes effect on Aug. 2, 2024, with manufacturers given another year to reformulate, relabel and deplete their inventories of BVO-containing products before the agency starts enforcing its ban, the FDA said.” Wha? https://t.co/2BlNxk7Vp5" --- (KMB, twitter, 2024/07/04)

"As such, we are exposed to and impacted by global macroeconomic factors, geopolitical tensions, U.S. and foreign government policies and foreign exchange fluctuations." --- (PG, sec filing, 2024/Q3)

Future Outlook and Strategic Adaptations

Consumer staples companies are adapting to elevated inflation by focusing on strategic initiatives such as innovation, margin optimization, and supply chain improvements (KMB). They are also increasing brand investments to ensure future growth (CL), leveraging AI for operational effectiveness (KO), and aligning M&A activities with strategic priorities (GIS).

"On March 27, 2024, we announced the 2024 Transformation Initiative designed to sharpen our strategic focus through a new operating model that leverages three synergistic forces: • Accelerating pioneering innovation to capture significant growth available in our categories by investing in science and technology to satisfy unmet and evolving consumer needs, • Optimizing our margin structure to deliver superior consumer propositions and implement initiatives and deploy technology and data analytics designed to create a fast, adaptable, integrated supply chain with greater visibility that can deliver continuous improvement, and" --- (KMB, sec filing, 2024/Q2)

"Most importantly, despite an expected mid-single digit negative impact from foreign exchange, we’re guiding to mid to high single digit base business earnings per share growth, and we’re doing this in the context of meaningful increases in brand investments that will set the stage for growth in the future." --- (CL, earning call, 2024/Q1)

"But I want to start bigger picture. I think if you tend to take a step back and you think back to the company's new strategic launch back in 2018, you've managed to deliver through lots of volatility, very consistent results in line, at least in line with your long term algo, while also reporting solid progress against snacking made right objectives." --- (MDLZ, conference, 2024/06/04)

"This means that we intend to be a leader in using AI to support our marketing agenda and enhance overall operational effectiveness, which means we're embracing the need to take risks, responsibly experiment with AI across our system and build on what we learn to drive scale.In parallel, we're also investing in solutions and making progress through collective action with industry partners, nonprofits and governments to create a better shared future." --- (KO, event transcript, 2024/05/01)

"To your second point around criteria for M&A, obviously, the critical filter for us that we start first with our strategic priorities, which leads us to look at critical occasions, which would get us to priorities around breakfast and convenience -- convenient meals and snacking, as well as obviously pet food." --- (GIS, earning call, 2024/Q4)