Over the past two weeks, several consumer packaged goods companies (CPG) companies have reported softer-than-expected results and discussed the consumer as more “pressured.”
Broadly speaking we have the following observations: (1) the lower-income consumer cracked more this year, as we’ve consistently written about, as essential services inflation (insurance), interest expense (locked in rates jumping to much higher floating rates), and tighter credit has further eaten into household budgets. The CPG category serves all income groups. The median pre-tax household income for the bottom half of the country is $30K according to the BLS Consumer Expenditure Survey. Insurance going up by 20% and monthly finance charges by 2-5X is going to impact the CPG category; (2) Households are cross shopping multiple grocers/retailers to find the absolute best value of that brands offering, cherry picking promotions, and increasingly shopping club, mass, and extreme value like Aldi. This creates channel shift challenges for national brands; and (3), Costco, Sam’s, Walmart, and Target are telling brands that to do business with them, they need to lower their prices. That lowers organic revenue growth. The table below shows the slowdown for four large packaged manufacturers.
None of the above trends are new, but they may be broadening out a little--see Aldi, Walmart, and Costco traffic below--but the only real change is that all consumers, most retailers, and certainly the Federal Reserve are fed up with the absolute high level of prices in food and home & personal care products. For CPG to build back volume and share-of-consumption, they likely need to meaningfully roll back prices and see a large hit to profitability. However, for retailers’ discretionary mix, that also sets up the opportunity for a better period ahead.
