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Who says inflation is bad? Rising prices are helping some consumer giants deliver their strongest growth in years.
But look a little farther ahead, and this could be as good as it gets for them for a while.
Inflation in everything from coffee to packaging is accelerating. Ultimately, it’s shoppers who will have to pay. And when further price increases are passed along to them, there’s a strong chance they will rein in their purchases of big brands and flock to value retailers, such as dollar stores in the US and the German discounters Aldi and Lidl in Europe.
Right now, large manufacturers such Nestle SA, Unilever Plc, Procter & Gamble Company and Danone SA are in a sweet spot. Nestle, for example, lifted its forecast for underlying sales growth this year to 6%-7%, its highest rate of annual expansion for a decade, as it enjoyed a resurgence in sales of bottled water (as some people ate out again ) and sales of Starbucks coffee capsules (as others stayed home).
Although these giants have begun to raise prices, it hasn’t really affected the amount of goods they sell so far. At Unilever, for instance, while sales volumes fell by 1.5% in its third quarter, 1 percentage point of this was from disruption to its businesses in southeast Asia from Covid-19 outbreaks and restrictions.
The trouble is, the pressures on costs show no signs of abating. Manufacturers are already battling supply chain snarl-ups — getting their products on shelves is hard enough given congested ports and labor shortages. The commodities they need to make their products — from palm oil and milk to aluminum — are also becoming more expensive. Unilever warned that inflation could be higher next year than in 2021, although Chief Executive Officer Alan Jope said it would peak in the first half of 2022. That could prove optimistic.
Either way, it means more of these costs will have to be passed onto retailers, and ultimately shoppers. This is already happening somewhat, but there will be more to come. In Europe, price negotiations between manufacturers and grocers are under way and will continue into the first quarter of next year. Consumer groups will try to pass on their extra costs, as well as those they expect in 2022.
The manufacturers do have levers they can pull to ease the pain, including slashing their own operating costs.
—Bloomberg