"Price cliffs" are prompting cash-strapped consumers to abandon brands
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Consumers are recoiling at food inflation, punishing manufacturers and retailers that hike prices.
Why it matters: After years of rising grocery bills, people are fed up and looking for alternatives — including private label brands, lower-tier retailers and discounts.
Driving the news: General Mills CEO Jeff Harmening said Wednesday that the company's price-cut decisions over the past year have focused on "price cliffs," or levels where consumers will stop considering their products.
- "We see people switching some categories. We see consumers switching where they purchase, switching channels," Harmening said on an earnings call, referring specifically to consumers making under $100,000 a year.
- "What we see is that consumers, when there is a discount, we see them buying more because they're financially strained," he added.
Zoom out: General Mills' price/mix in North America is down about 3% this year, easing slightly after more than 30% in cumulative inflation-driven price increases in recent years. Price cuts have helped boost sales volume but have cut into profitability.
- Competitors are facing similar choices. PepsiCo said earlier in December that it would lower prices in key food brands to boost sales volumes.
- And Harmening's comments came a week after Campbell's Co. reported that its attempt to raise prices on some of its ready-to-serve products had backfired.
Zoom in: "Select price increases put pressure on our mainstream RTS portfolio consumption, resulting in market share declines," Campbell's Co. CEO Mick Beekhuizen said on an earnings call.
- But he said the company needs to maintain the price hikes to offset the impact of "disproportionate tariff-related inflation."
Follow the money: Looking to save, many consumers — including higher-income folks — have been trading down to store brands and more affordable shops, such as Walmart, Dollar General and Dollar Tree.
- 3 million additional households shopped at Dollar Tree in the third quarter, compared with the same period a year earlier. Of those, about 60% had household income of more than $100,000, according to CEO Michael Creedon Jr.
- At Dollar General, "disproportionate growth" is also coming from higher-income households, CEO Todd Vasos said on a recent earnings call.
The bottom line: The pandemic-sparked bout of price elasticity has ended.
