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U.S. consumer sector braces for slowing demand as inflation bites

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·2 min read
FILE PHOTO: Shoppers are seen wearing masks while shopping at a Walmart store, in North Brunswick, New Jersey
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By Uday Sampath Kumar

(Reuters) - U.S. consumer goods firms, including P&G and Coca-Cola, are preparing for an impending slowdown in demand as runaway inflation fuels a surge in prices of everything from toothpaste to sodas and hammers the spending power of Americans.

Companies, including Gillette-maker P&G, PepsiCo and Hershey Co, saw surging sales during the pandemic even though they were forced to increase prices to combat rising costs of raw materials, labor and transportation.

However, top executives at several companies have warned over the past week that their actions to pass on the costs to consumers may come back to bite them and slow revenue growth.

"As we look ahead to the remainder of this year, we expect pricing power to remain strong, but (demand) elasticities to revert to historical levels," Hershey CEO Michele Buck said on Thursday.

Buck cited a fall in government benefits for the first time in two years and depleting consumer savings due to inflation outpacing wage growth as reasons for the demand reset.

U.S. consumer confidence edged lower in April as Americans turned less upbeat about the economy, and analysts are warning that it may only worsen.

"At least for the past year or two, CPG companies have been able to raise prices without seeing any meaningful dips to demand. That was an unusual operating environment for them but that's unlikely to last," CFRA Research analyst Arun Sundaram said.

"At some point we'll see a meaningful shift in consumer behavior."

To cope with the expected slowdown in consumer spending, companies are starting to take a wide range of measures, including the launch of cheaper products or cutting back on packaging.

Earlier this week, P&G said it was moving out of discretionary categories and focusing more on recession-resistant daily use cleaning and hygiene products, while Coca-Cola's CEO James Quincey said the company was expanding the use of cost-effective glass bottles.

Some companies are seeing the writing on the wall.

PepsiCo said demand in some emerging markets was starting to slow in response to price increases, while McDonald's said the effects of inflation had led lower-income customers to start buying cheaper or fewer menu items in some areas.

"The lower income consumer is probably feeling more pressure than the average consumer or wealthier consumer. We need to make sure that we continue to have value be an important part of our proposition," McDonald's CEO Chris Kempczinski said.

(Reporting by Uday Sampath in Bengaluru; Additional reporting by Medha Singh; Editing by Sweta Singh and Anil D'Silva)