The consumer economy is starting to crack under inflation

Published : 30 Nov 2022 08:02 PM

Shoppers on both sides of the Atlantic are under intense pressure from inflation.

So far, sales of everything from luxury goods to laundry detergent have been better than expected. But cracks are already emerging in demand — and these are set to intensify as winter draws in.

There’s no escaping the fact that, up to now, customers of the big consumer goods groups have been remarkably resilient. This has prompted many companies, including the world’s biggest food seller Nestle SA and Durex and Dettol maker Reckitt Benckiser Group Plc, to see sales growth at the top of their previous ranges, and to maintain their margin outlooks. The good news continued on Thursday, when Unilever Plc upgraded its expectation of full-year sales growth, while the world’s biggest brewer AB Inbev SA said profit expansion would be toward the top of its previous range.

But there are signs that shoppers are beginning to cut back on more discretionary purchases, particularly in Europe and the UK.

Last week, L’Oreal SA said it was seeing women go longer between hair appointments. Chief Executive Officer Nicolas Hieronimus also told Bloomberg TV that some British shoppers were trading down to cheaper skincare ranges to cope with inflation at a 40-year high.

This caution was echoed by Reckitt Benckiser, which said consumers in many of its markets were not freshening their homes as frequently with budgets coming under pressure. Much of its over-the-counter medicine business, such as its Nurofen, Strepsils and Mucinex ranges, have been resilient, given people’s trust in the brands and the need to treat cold and flu symptoms. But shoppers were shunning some of its more discretionary vitamin ranges, such as its Neuriva brain supplement.

Similarly, Unilever has seen consumers trade down to private labels, buy more from discounters and cut back altogether in more discretionary categories, such as desserts in Europe and mid-priced ice-cream in the US. However, its premium beauty and health and wellness business, as well as its most value-focused lines, were holding up.

Indeed, Europe is the epicenter of worry for many of the big manufacturers, including Unilever and Reckitt. Shoppers there are poised feel the effects of high energy prices most acutely. Add in the fact that price hikes for essentials — already nudging double digits — are set to continue, which will absorb more of households’ incomes and pandemic savings, and the region is a particular cause for concern.

Another worry is that cheaper private-label offerings are well developed across the continent. Although the hard discounters such as Aldi and Lidl, are forging across the US, their heartland is in Europe. They primarily sell their own brands, providing customers with an affordable alternative to big household names.

There are indications that US budgets are starting to shrink too. Procter & Gamble Co. said it was seeing some consumers trade down from its premium SK-II skincare to more affordable products. In the supermarket aisles, some shoppers were switching to cheaper laundry detergent. They were using a variety of strategies to cut their outlays — for example, buying bigger pack sizes — and more cash-strapped consumers were focused on reducing how much they spent at a given time.

Meanwhile, Olaplex Holdings Inc. echoed L’Oreal’s caution in reporting that American women were not only going longer between hair appointments, but spending less on its specialist shampoos and treatments each time they visited salons.

These signs don’t alter the fact that demand has mostly held up amid price increases much better than predicted on both sides of the Atlantic. But when Walmart Inc. warned on profit in July, it was only a matter of time before its big suppliers started to share its pain. That point is now upon us.

Andrea Felsted is a Bloomberg Opinion Columnist. 

Source: Bloomberg