Concerned about a customer exodus due to excessive pricing, investors target manufacturers of consumer goods

Leading U.S. and European investors are raising concerns with consumer goods businesses about high costs, with Janus Henderson even going so far as to reduce some of its holdings and short food producers it thinks may lose customers.

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The sector, which is expected to release second quarter earnings in the coming weeks, has been drastically raising prices for more than two years to offset skyrocketing cost inflation that began with the COVID outbreak and got worse as a result of shortages brought on by Russia’s invasion of Ukraine and inclement weather.

Consumer prices increased 4% in the United States in the year that ended in May, while food inflation in the euro zone was 12.5% in that same month.

Manufacturers of consumer goods claim that margins have been hurt during the past two years and that the price increases are necessary. Some businesses, like Clorox (NYSE:CLX), have even started to scale back the increases in order to protect sales volumes as input costs decline. With more than 250 billion pounds ($322.45 billion) in assets under management, Janus Henderson, one of the biggest investors in the world, stated that it had already reduced shares in some food companies because continuing high pricing could cause a rapid decline in the numbers they sell. According to Janus Henderson portfolio manager Luke Newman, “These pressures are more intense in the United States specifically than they are in Europe.” There is a very real chance that volume may decrease, and this might have a dramatic impact on these companies’ revenue. According to Newman, the asset management is specifically investigating cereal producers as well as food producers.

In addition to initiating some short positions, we’ve actually cut our holdings to those categories, he added.

Other investors have also stated that they are speaking with consumer goods companies about the impact of high pricing on volumes, including Richard Marwood, a senior fund manager at Royal London Asset Management.

Because the asset management company anticipates revenues to “decelerate,” according to portfolio manager Robert Klaber, San Francisco-based Parnassus Investments has been talking about reducing its interests in businesses that provide home essentials.

Among other manufacturers and retailers of consumer goods, Parnassus holds stock in P&G and Mondelez (NASDAQ:MDLZ), the company that makes Triscuits.

Some investors in the United States are concerned that cuts to the low-income people’s food stamp program and the reversal of the Biden administration’s student loan forgiveness plan will have a negative impact on consumers’ purchasing power.

According to Barclays (LON:BARC) analyst Iain Simpson, the power of the American consumer has started to wane.

CUTTING BACK

Companies have mainly avoided harm to earnings and margins caused by rising raw material and energy costs by passing them on to retailers and consumers.

Nevertheless, margins have often declined 2-4 percentage points over the previous two years for the consumer products market due to cost inflation. However, some still have a respectable 16–18% rate. However, because consumers “trade down” to less expensive private label substitutes and smaller pack sizes, price rises have frequently come at the expense of sales volumes.

According to restructuring consultant Alvarez & Marsal, median reported prices at the top 30 consumer goods companies in the world increased on average by 11.2% in the fourth quarter of 2022, while median sales volumes decreased by roughly 2%.

Food, beverages, and alcohol sales saw less pronounced decreases but sales volumes in the household & personal care sector, where Procter & Gamble (NYSE:PG) is No. 1, decreased by about 5%.

Accusations of “GREEDFLATION”

Manufacturers and merchants of consumer products have been accused of price gouging and “greedflation,” or inflating prices above necessary to cover high input costs, by some legislators and regulators in the United States and Europe.

In response, David Chavern, CEO of the Consumer Brands Association, a business association that includes P&G and Clorox, claims that the sector has “contended with a stream of unprecedented inflationary pressures” since the outbreak.

According to others, the ensuing domino effect has had waves of consequences on consumer expenditures, he said. The industry is cautiously managing this moment while continuing to work nonstop to meet customer demand because our economy is still in a stabilizing stage, not a deflationary one.

Since “greedflation” puts short-term profit ahead of long-term customer loyalty and sales, the issue is crucial and one that investors should bring up with businesses, according to Stephanie Niven, portfolio manager of the Ninety One Global Sustainable Equity Fund.

“Consumer relationships are under scrutiny, possibly in jeopardy, and a company’s long-term competitive advantage, especially if it depends on customer brand loyalty, can be very problematic,” said Niven.

According to Norges Bank Investment Management’s portfolio manager Irene Jensen, “there are some companies who have probably been a bit opportunistic” and the idea of price gouging is “potentially harmful.”

As Jensen noted, her team had expressed concerns to businesses. “The risk now is that the consumer down-trades into private label, gets to test out these products, and then discovers that they’re as good as the brands or good enough for them,” she said.

Some asset managers contend that the charges of opportunistic price increases are unjustified.

“We will have to wait a few months or quarters till we know who’s right,” said Thomas Joekel, a portfolio manager at Unilever (NYSE:UL) and a top-20 Reckitt shareholder, adding that companies’ declining margins were evidence that they were not overcharging customers.

(1 dollar = 0.7753 pounds)