Demand proves resilient despite inflation
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Makers of everyday household goods say consumers are sticking with them despite double-digit price increases. A raft of American and European companies producing packaged food and other staples such as tissues and cleaning products have reported results over the past week or so, and the results are encouraging. The latest was Colgate-Palmolive on Friday, which said organic sales—a key industry metric that strips out the impacts of currency fluctuations, acquisitions and divestitures—increased 10% from a year earlier in the first quarter. Analysts had expected the consumer-products company to log growth of 6.9%, according to VisibleAlpha. Colgate’s overall organic pricing was 12% higher, meaning underlying sales volume fell 2%. But that is an encouraging figure. It suggests that elasticities, or the degree to which consumers respond to price increases by reducing purchases, were mild in the first quarter, and indeed improving: In the fourth quarter, Colgate’s sales volume fell 4% on 12.5% higher prices. The picture was much the same across the sector. At Unilever, the European consumer giant behind brands such as Dove soap and Hellmann’s mayonnaise, sales volume was down just 0.2% on 10.7% higher prices. At Coca-Cola, volumes were actually up 1% even as pricing was up 11%, delivering 12% organic sales growth. “Every quarterly result feels the same in Q1,” remarked Bernstein analyst Bruno Monteyne, who covers European staples companies, in a note. There are differences between how the various companies report sales metrics, and differences between accounting standards used by European and American companies. But using broadly comparable figures, for nine major companies on both sides of the Atlantic that have reported results since April 21, pricing was up 11.3% from a year earlier while volumes fell just 1.8%. This suggests consumers worldwide have been able to absorb price increases, and have yet to trade down significantly to cheaper options such as private-label products. Tight labor markets and increasing wages, especially in the U.S., are likely a factor supporting consumers at the low end of the income spectrum who might be expected to adjust shopping habits first. What is more, private-label competitors have been forced to raise prices as well in response to cost to inflation, companies said. There were some exceptions. In a conference call with analysts, Unilever said elasticities have been higher for highly discretionary foods such as ice cream. As was the case last year, elasticities were generally higher for household goods than packaged food, perhaps in part because the perceived quality gap with private label isn’t as great. The two companies with the biggest volume declines were Kleenex-maker Kimberly-Clark at 5%, and Reckitt Benckiser, the U.K. company that produces Lysol cleanser, at 4.5%. But in both cases the pace of decline moderated significantly from the fourth quarter. This is encouraging because it suggests investors are adjusting to sticker shock after a lag. And, in the case of Lysol, sales were coming off an inflated base from the first quarter last year, when the Omicron Covid-19 variant was prevalent. On average, shares prices of the nine companies are up around 7% so far this year—in line with the S&P 500’s performance. The four major European companies in the group have fared better, climbing by an average around 12%, perhaps because they faced lower expectations going into the year. Of course, should a U.S. or global recession come that hits consumer incomes, a different set of challenges will emerge for these companies. However, recent track records suggest their stocks are still fulfilling their traditional role as a source of resilience in investor portfolios
