Sales declined from November to December; a trend backed up by data from the Census Bureau, which showed a decline of 1.9%in those two months. Consumer sentiment has been falling over recent months and downshifted to its second-lowest level in 10 years in the early part of the month and corporations are starting to report record profits.
So far, corporate America has had a perfect pandemic. Still, large companies have had no problem passing those costs along to consumers, which is why profit margins — that is, profits as a share of sales — are also at record highs.
According to data compiled by FactSet through Friday, S&P 500 companies are reporting an average net profit margin — net income as a percentage of revenue — of 13.0% in the second quarter. This is the highest profit margin since FactSet began tracking the metric in 2008.
Corporate profits are up; consumer sentiment is down. There seems to be a problem here.
Marketers would look at the environment consumers are in right now. COVID worries are back, inflation is rampant, and stores are still short of many products. Adding fuel to the fire is that companies are ready to report record profits, and you have the recipe for some outraged consumers.
Many big brands don’t seem concerned about passing price increases to customers in the wake of rapid inflation and supply chain bottlenecks. But perhaps they should be, with many federal stimulus effects fading and rising consumer concerns about higher prices.
Executives at companies like Procter & Gamble, Nestlé, and PepsiCo have increased prices over the past year. Still, they have almost universally said brand loyalty is more vital than ever—implying, if not outright stating, that they’ll weather the inflation just fine. Really?
IRI research across thousands of products shows that while price elasticity—or how much a price hike results in volume declines—declined markedly in 2020, it began moving back up in 2021 and is likely to increase more in 2022. Some expect volume across all of consumer packaged goods to decline 1% to 5% next year, while revenue rises 1% to 5% overall thanks to price increases.
When brands do raise prices, they’d better be discreet.
Too many brands are trying too hard to please the Street at the expense of their customers. They take naked pricing. They render themselves vulnerable. They’re scared to change package sizes. Savvy marketers will use every way to avoid noticeable price increases that people will resist. That includes reducing package sizes, launching loyalty programs, offering value packs that offset higher prices, and making noticeable product improvements that could justify a higher price.
Higher prices on branded goods are also a huge opportunity for private label sales to take more share from brands. It’s going to happen sooner as many brands realize that their brand equity isn’t as substantial as they thought it was.