CPG pricing: Are we about to revert to the mean?

CPG companies likely to face higher consumer price sensitivity as consumer debt returns to pre-pandemic trends

Consumer demand has shown remarkable endurance in the face of soaring inflation. Firms benefited as well, capitalizing on price hikes without a pull back in demand. Inevitably, though, increasing consumer spending and higher prices must run up against consumer budgets. The question is, then, are we starting to see consumers pulling back?

Evidence is mounting of concerned consumers seeking relief. Recent data from the Survey of Consumer Expectations conducted by Federal Reserve Bank of NY find consumers expecting a slowdown in food price inflation. At the same time, concerns are growing about credit access in the forthcoming year, underscoring the role consumer credit plays in consumer spending. In its latest Quarterly Report on Household Debt and Credit, the Federal Reserve Bank of NY reported continued growth in total household debt during the second quarter of 2023, totaling an all-time high of $17.06 trillion, which amounts to over 60% of the country’s GDP. Compounding the situation, credit card interest rates have skyrocketed, surpassing the 20% mark.

However, the current state of consumer debt presents only a partial picture, and it’s helpful to look at patterns from the start of the pandemic. The graph below, taken from the Federal Reserve Bank of St. Louis, presents an interesting pattern. Revolving consumer loan amounts, which include credit card debt, were increasing linearly prior to the pandemic at an annual growth rate of 6% from 2015 to 2019. In March 2020, though, consumer loans fell precipitously coinciding with the pandemic's onset and reaching its lowest point in April 2021. At that time, the actual revolving consumer loan amount was only 80% of the amount projected from the pre-pandemic trends. Since then, consumer loans have bounced back and grown at a faster rate of 14.3% per year. By the end of July 2023, consumer loan amounts had caught up to 95% of the amount projected from the pre-pandemic trends. We will need to watch to see if consumers will continue to accumulate debt at the accelerated rate or revert back to the lower pre-pandemic rate.

When we factor in other forms of debt, notably rising housing debt, it becomes increasingly evident that the realities of household budgets may soon challenge consumer resiliency. Any change in consumer preferences and purchasing behavior can affect CPG’s optimal strategy in the marketplace.

AlixPartners study provides evidence of increased price sensitivity and highlights need to revise revenue growth

With consumer debt rebounding, AlixPartners employed an econometric demand model to test the hypothesis of whether consumer price sensitivity increased over the time period from January 2021 (when the drop in consumer debt started stabilizing) to May 2023.

Our model relied on the SPINS weekly retail multi-outlet retail scanner data, which captures nationwide spending patterns. We focused on twelve different categories, including baked goods, beer, energy drinks, milk, produce packaged fruit, produce packaged vegetables, diet soda, regular soda, chocolate candy, coffee beans, cookies, and non-carbonated water. The model includes prices, consumer credit and disposable income data sourced from the Federal Reserve, and seasonality to explain changes in consumer spending of each category over time. [1] There may also be other economic factors in play.

The results of our modeling suggest that all else equal, higher consumer debt increases price sensitivity across all twelve product categories studied (to a statistically-significant extent in most categories).

The study shows that consumers are exhibiting higher price sensitivity in many cases. Five product categories—milk, packaged fruit, packaged vegetables, regular soda, and chocolate—displayed increasing price sensitivity since January 2021. However, four categories—coffee, cookies, energy drinks, and non-carbonated water—showed reduced sensitivity over this time. For baked goods, beer, and diet soda, there was no discernible change in price elasticity over this period.

Overall, we find that:

• Consumer debt tends to increase price sensitivity. Companies should keep an eye on how the increasing and record levels of consumer debt will factor into consumer spending behavior.
• Consumer price sensitivity is complex and multifaceted even after controlling for consumer debt levels.
• While a significant number of product categories demonstrate an increase in overall price sensitivity, suggesting that consumers are becoming more budget-conscious in certain areas, other categories resist this recent trend.
• The absence of a uniform shift across all categories highlights the complexities in examining consumer preferences.

As market dynamics continue to shift, so will the importance of having a bespoke pricing strategy, one that is built to address the complex shifts in category level (and value tier) price sensitivity . CPGs operating in categories that are facing increased price sensitivity will need to seek contributions beyond pricing - including innovation, price-pack architecture, portfolio optimization, and retail execution - to achieve the next frontier of profitable growth.

[1] We translated the weekly SPINS figures into monthly figures to be compatible with the monthly consumer credit data.