CPG Playbook   //   January 12, 2024

The backlash to price hikes is building

CPG giants are facing mounting pushback over price hikes.

Last week, French supermarket giant Carrefour said it would not sell PepsiCo products such as Lay’s chips or 7Up at stores in four countries due to “unacceptable” price increases. In May, Belgian supermarket chain Colruyt engaged in a months-long price spat with Mondelez, the company behind Oreos and Milka chocolates. This debate first began to rear its head over a year ago when, in October 2022, German supermarkets Rewe and Edeka challenged Mars, the maker of Snickers and Twix, over price hikes. All are happening as grocers report private-label sales continue to grow.

Since the pandemic, major food, beverage and household products companies have upped prices in an attempt to offset inflation and higher fuel and raw materials costs. Colgate, Unilever and Procter & Gamble all increased prices by double-digit percentages over the past year. Supermarkets and pharmacies across the U.S. have accommodated many of these price hikes, even if they affect their own bottom lines, due to the popularity of certain products. But now, more stores that carry these products are taking a stand against soaring prices.

Right now, brands and stores are playing a “game of chicken,” Rob Dongoski, global lead for Food and Agribusiness at Kearney, told Modern Retail. They benefit from higher prices, but “they don’t want consumers to trade down,” he said. Already, many shoppers are switching from name brands to private-label goods, with 79% of consumers trading down to save money, according to McKinsey.

In November, Kroger said its private label products helped boost margins and had a high customer repeat rate. In October, Sprouts Farmers Market said its Sprouts Brand sales grew 14% and represented nearly 21% of total sales.

Consumers are already shouldering high costs of living, and for some, price hikes at the grocery store are affecting what they buy. PepsiCo, for instance, has seen sales volume decline across one or more brands every quarter since the fourth quarter of 2020, according to its financial results. Kraft-Heinz’s volume was down 5.4% year-over-year, as of September.

Some companies have pulled back on hikes in recent months. Kraft-Heinz and Clorox, for instance, said in February that they didn’t expect hikes for the rest of the year, while Kroger’s CEO mentioned lowering prices in recent earnings remarks. Other brands have chosen not to raise prices, but rather to reduce the size of their packaging, a method known as “shrinkflation.” And yet, some companies continue to raise prices. On an earnings call in October, PepsiCo’s CEO remarked that “2024 will have a bit more elevated price mix in the equation than in the previous years.”

When a CPG brand and a grocery store do split over price hikes — as is the case with Carrefour and PepsiCo — both are taking a risk, because neither can guarantee the customer will follow, Dongoski said. “If Carrefour says you can’t buy Pepsi at Carrefour, does the consumer go, ‘Yeah, but I like everything about Carrefour. I’m going to just buy a substitute for Pepsi?'” Dongoski asked. “Or do they say, ‘I really like Pepsi. I’m going to go to a different store that carries Pepsi?’ I don’t think we know yet.”

If brands do continue to increase prices, supermarkets “can’t control that,” Jason Goldberg, chief commerce strategy officer at Publicis Groupe, told Modern Retail. But, supermarkets can proactively focus on their own brands and create a bigger gap in price between their branded products and national brands, he pointed out. That way, cash-strapped customers may actually choose the alternatives to name brands first.

Curiously, on the consumer side, the growing backlash to price hikes “lags behind” economic indicators, Goldberg pointed out. Inflation today (3.4% in December 2023) is less than it was a year ago (6.5% in December 2022), and yet, “I feel like consumers are expressing concerns and changing their spending patterns more now than they were then,” Goldberg said.

Grocery inflation, however, outpaced regular inflation for many months in 2023. It has since come back down; food prices for the 12 months ending in December rose 2.7%, compared to 4.9% for the 12 months ending in July. But, many grocery stores are still under price pressure. According to the U.S. Bureau of Labor Statistics, four of the six major grocery store food group indexes increased over the month of December.

Goldberg attributes the backlash to the impact that groceries have on people’s budgets. “They tend to feel the pain of what they spent in the rearview mirror, not what they’re spending right now,” he said. Additionally, consumers tend to react to what they read in the news, and coverage of inflation relies on delayed data from the government, Goldberg pointed out. A segment on TV, for example, about high egg prices will reflect numbers from the previous month, not the current week. This month, Marketplace ran a segment called “If inflation slowed down in 2023, why is my grocery bill so high?” and concluded that “even the prices that dipped slightly have not come down anywhere near pre-pandemic levels.”

Ultimately, food prices are in a bit of a “positive and negative spiral,” Goldberg said. “I do think there’s a cumulative effect to all the doom and gloom that causes consumer sentiment to go down, and that then causes prices to go up more.”