Consumer Prices Lose Their Elasticity

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You know price resistance is palpable when Procter & Gamble, for all its analysis of the consumer’s psyche, can’t pull off a 9% increase on a product that only the most ardent shoppers remember what they paid the last time they were in the aisles.

P&G announced its quarterly results Friday –- an eye-catching 49% drop in profits due to things that had a lot to do with rising commodity prices, unfavorable currency rates and the cost of acquisitions. It says it still expects core sales to rise 4% to 5% this year, but it “lost market share across a greater portion of its business lines in the past quarter than previous ones, partly because competitors had held back on raising prices when P&G did,” Paul Ziobro writes in the Wall Street Journal. “P&G is rescinding some of those price increases, an acknowledgment that it may have misjudged the developed markets' tolerance for paying more for everyday household goods.”

In the U.S., the company is reversing the price increase it implemented for Cascade dishwasher detergent in June after Reckitt Benckiser didn't also bump the price on its Finish brand. It will also consider taking steps on laundry products in the U.K. and U.S., according to Chairman-CEO Bob McDonald.

"We're closely monitoring these situations and we're going to react," he said on a conference call.

“P&G knows it must proceed carefully or risk driving away customers,” writes Christina Rexrode of the Associated Press. “In the last (third-quarter) earnings call, it said higher prices hurt its market share in Western Europe and North America. But Friday, executives sounded more optimistic. They said more competitors were raising prices as well, which should stem any loss of market share.”

McDonald said P&G observes what other companies do when it raises prices, and if they don't follow suit, "then we react to resume the value equation we had when we were growing share." He also said he “expects P&G's advertising costs to moderate as it moves more spending into digital media, where the sheer number of options and availability of largely free distribution drives down expenses,” Jack Neff reports in Ad Age.

"In the digital space, with things like Facebook and Google and others, we find that return on investment of the advertising when properly designed, when the big idea is there, can be much more efficient," according to McDonald.

The delicate art of raising prices remains an issue for many marketers, if only to pass along increases in commodity prices, points out Francine Knowles in the Chicago Sun-Times. Consumers are grappling with “pay cuts and shorter hours in the wake of the Great Recession and the loss of income after a spouse’s job was axed.”

Consumer prices increased an average of 2.7% in the Chicago area last year over 2010, according to the Labor Department but that statistic “doesn’t paint the full picture of the bigger hits higher prices in some key categories have been delivering to consumers’ wallets,” she writes.

“There are a lot of things that are up and up a lot,” Morningstar economist Robert Johnson tells Knowles. “I don’t know too many people who got a 3% raise last year.”

Employers paid about 12% more in health insurance premiums last year in the area, for example, and gasoline prices soared 27% on top of a 20% rise in 2010. Grocery prices were up 4.3%.

“If the recovery is going to continue in 2012, we need to see moderate prices because nothing stops an economic recovery faster than inflation, nothing,” Johnson says.

Don’t look to beef prices to lead the way. Due largely to the drought in Southwest, the domestic cattle herd is at it lowest in 60 years. Consumers may be paying 5% more for beef this year -- the biggest increase among all food groups except for seafood –- according to a USDA report cited by Bloomberg Businessweek’s Elizabeth Campbell, following an estimated 10.2% jump last year. Overall, food costs are projected to rise 3.5% in 2012, according to the government.

Sterling Marketing consultant John Nalivka tells USA Today’s Paul Davidson that beef prices could rise as much as 10% this year but points out that neither meat packers nor retailers are passing along the entire price increases they’re experiencing to consumers. He predicts packers will lose $312 million this year, saying that with still-high unemployment figures, consumers may resist big price increases.

Supervalu spokesman Mike Siemienas tells Hacker that it, too, absorbed part of last year's rise in costs. "Our goal is to minimize any price increases to our customers," he says.

Many marketers may find themselves singing the same tune for the foreseeable future.

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2 comments on "Consumer Prices Lose Their Elasticity".

1. Paula Lynn from Who Else Unlimited
   

   commented on: January 30, 2012 at 9:30 a.m.
   "Resist" is not the right word. Not having the money is more like it. With the packaged foods, they have increased packaging, decreased volume and loaded with chemicals. Pretty much the same for other packaged goods. People do not have choices but to cutback.
2. Bruce Levinson from Anthem Worldwide
   

   commented on: January 30, 2012 at 10:42 a.m.
   Managing costs is not a “yes or no” question. Brand owners will find they must offer consumers good value for the benefits they seek AND seek margin protection through a range of value-add offerings across the price spectrum, through innovation in less cost-sensitive segments, and via a rigorous promotional strategy. Commodity inflation is a global phenomenon; outsmarting the competition will be more effective than trying to "outrun the bear."

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