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Top consumer brands are looking to boost growth through better advertising and a return to dealmaking as the sector runs out of road on raising prices, with shoppers weary of soaring bills and many defecting to cheaper alternatives.
The biggest companies in the sector have managed to boost sales revenues in the past two years by raising prices to offset higher costs and volume losses as people reduced their grocery spending. Now they face a dilemma: how to restore volumes while their labour and some commodity costs remain high even as overall inflation eases.
The biggest companies in the sector have increased prices by up to 20 per cent on average compared with two years ago but volume growth remains negative or extremely low, according to company data compiled by Barclays.
Consultancy Bain & Company calculated in a recent report that although the value of retail sales in the consumer products sector was up 10 per cent year-on-year in 2023, three-quarters of the increase was a result of price rises.
However, some of the biggest names in the sector have made it clear that the era of sharp price increases is over.
Diageo chief executive Debra Crew said at the CAGNY conference of consumer analysts in Miami last month that prices would “normalise to one to two points of growth in line with historical pre-Covid levels”.
Unilever’s chief executive Hein Schumacher said during its full-year trading update that pricing would return to “normal levels” this year, and could even deflate in certain South Asian countries, while Nestlé’s chief financial officer François-Xavier Roger said the company would largely do “far less pricing” in 2024, with the exception of moves relating to emerging market currency depreciation.
Instead, the industry is being forced to invest in better promotion, advertising and deals to win back consumers.
Executives presenting at CAGNY emphasised this with companies including Hershey, Mondelez and Conagra Brands saying they would use “price pack architecture” — a range of package sizes — to serve consumers at every price point and at every opportunity in the day.
PepsiCo, for example, said it would prioritise “ubiquity” and “affordability”. “We want to make sure that our products are everywhere,” said chief executive Ramon Laguarta.
Others signalled they would spend more on advertising. General Mills chief executive Jeff Harmening said the Cheerios maker’s media spend was “up high single digits through the first half of fiscal ‘24”, while Mondelez’s Dirk Van de Put said the company’s “double-digit increase in advertising and consumer spend”, gave it a competitive advantage.
US chocolate group Hershey caused a stir when it brought basketball star Shaquille O’Neal on to the stage to announce a partnership for its gummy sweets. Chief executive Michele Buck said the company had increased its media spend to 7 per cent of net sales, its highest ever, in 2024. The confectioner’s advertising expenses rose by 5.8 per cent in the fourth quarter of 2023 compared with a year earlier. Hershey raised prices 8.3 per cent in the 12 months to December.
“The way to maximise delivery is to invest consistently in marketing,” said James Edwardes Jones at RBC Capital Markets. “The premium on companies that are doing that is only going to expand over the next couple of years.”
Companies attending CAGNY also signalled that small-to-mid-sized deals were on the table again, despite high interest rates, in a sign that companies were turning to M&A while organic growth remains elusive. Kraft Heinz, General Mills and Hershey all said they would look to drive growth through acquisitions.
Some deals occurred in the food and drinks sector last year, including JM Smucker’s acquisition of Hostess Brands, Unilever’s acquisition of frozen yoghurt brand Yasso, and Nestlé forming a joint venture with private equity firm PAI Partners to develop the Switzerland-based group’s European frozen pizza business.
“Divestments that improve top-line growth while not being too dilutive to earnings due to stranded costs are also being considered fairly broadly,” wrote Bernstein analyst Alexia Howard in a wrap of the event.
They face a difficult road, however. An analysis by Alvarez & Marsal found that almost half of the world’s largest consumer goods companies delivered negative shareholder returns in 2023, while the whole sector significantly underperformed the S&P 500 index, falling 26.4 per cent last year.
“Consumer staples were the next best thing after government issued bonds [pre-Covid],” RBC’s Edwardes Jones said, adding that combined with steady 2-3 per cent revenue growth and low interest rates at the time, the sector’s role as a defensive holding pushed up valuations. But he added that investors looking at the sector today were no longer convinced of growth prospects.
“People aren’t prepared to pay the valuations that they did a couple of years ago,” he said.
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