The dark truth about ‘inflation’ revealed by consumer staple companies this earnings season

On January 23^rd, Procter & Gamble (PG on the NYSE) reported a gross profit of $11.29 billion in its financial results, plus over $21 billion in net sales, which were up three percent year-on-year.

After a difficult economic backdrop in 2023, investors were pleased, but likely not surprised. After all, surely consumers still need household essentials like toilet paper, nappies and detergent, even in tough times?

The ugly truth

Yet these results belied a dark driver of the company’s increasing growth: the ease with which it passes costs onto their increasingly cash-strapped consumers. Shoppers who, for all the talk in financial headlines, have not yet seen a single interest rate cut in more than two years.

In a statement on its earnings, P&G clarified that their higher sales metrics were not in fact driven primarily by rising volumes in sales, but rather by higher prices:

This can be seen clearly when looking at the results in more detail. Let’s take the above figures from P&G as an example. The gross profits made up 52.7 percent of the net sales. And price rises for the quarter were between four percent higher and seven percent higher across the board for all P&G products.

What’s the reason behind this?

But why? Because it’s not only about inflation. After all, inflation in North America was around 3.8 percent at its absolute highest during 2023.

It’s also not because more consumer staples are being sold. The volume of sales for P&G’s ‘beauty’ and ‘fabric & home care’ products remained flat, plus ‘health care’ and baby, feminine & family care’ had drops of two to three percent.

Foreign exchange costs, meanwhile, dropped between one and three percent in most product categories, off the back of a stronger dollar.

Everyone else is doing it

This is not a solo performance by Procter & Gamble. Its nearest competitor, fellow manufacturer of detergents, deodorants and toiletries Unilever, domiciled in the United Kingdom, doesn’t report its latest earnings until February 8^th. However, we can look at their most recent financial results, released in October 2023.

In it, Unilever reported 5.8 percent growth in its prices during that quarter (Q3 of 2023) and a 0.6 percent volume decline in sales. In total, it showed that Unilever’s prices had grown by over eight percent already for the 2023 financial year.

Great Britain, even greater problems

And this was in the UK, where consumers suffered under far more headwinds like contracting economic growth even while battling the same inflation and high interest rates in 2023.

This means that, by October 2023, Unilever’s prices had increased by more than double the rate that inflation had – with some of P&G’s products, with prices seven percent higher, not far behind.

Middle and lower-income Britons are clearly feeling it too. According to retail insights specialists Kantar, the UK spent £500 million more on sales items this January than January 2023. Yet, at the same time, they say that:

Expert insights

This is not a phenomenon that only Invezz has noticed. Renowned economic analyses experts Groundwork Collective, based in the United States, announced new research results on January 20^th which revealed that corporate profits, rather than headwinds, had driven more than a third of all inflation experienced since 2020 – and 53 percent of inflation between April and September 2023.

Insights from Euromonitor International Consumer Lifestyle Survey

We also spoke with Filip Hoffmann-Häußler, industry Manager at Euromonitor International (EMI), who recently released their Euromonitor International Consumer Lifestyle Survey: 2023 data insights.

EMI surveyed over 40,000 consumers, with the majority of respondents earning an income as low as $0 to $2,500, but up to $40,000 per annum. This is what Hoffmann-Häußler had to say:

Hoffmann-Häußler confirmed that this directly and “to a large part” affected the sales volume declines of companies like P&G and Unilever.

However, these conglomerates are not trying to find ways to reduce the costs of their products, according to him. Instead, they’re focusing on getting to be even more premium in their brand categories (i.e. likely even more expensive as time goes on).

Let’s take laundry detergent as an example. Hoffmann-Häußler notes that the biggest detergent brands are intentionally making their items more expensive:

A vicious cycle

If companies are aiming to bulk up investor-attracting high revenues and EPS with more expensive products, rather than sales, this can lead to a vicious cycle.

After all, we’ve already seen in P&G’s case that higher prices lead to drops in sales volumes, which may prompt companies to rise prices further in order to claw back some dividends.

The real question, then, is: where does it end? And, with most central banks hinting that rate cuts will only happen later in the year, will it end in time for most households?