5 minute read 2 May 2022
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US Future Consumer Index 9: Have inflationary pressures brought consumer’s pricing worries to a head?

Kathy Gramling
By Kathy Gramling

EY Americas Consumer Industry Markets Leader

25-year consumer products and retail veteran. Integration and teaming advocate. Passionate mentor and transformative leader. Wine enthusiast.

5 minute read 2 May 2022
Related topics Consumer products and retail FutureConsumer.Now COVID-19 Customer Transforming retail
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Consumer response to inflation is emphasizing value and affordability causing companies to revisit near and medium-term strategies.

Three questions to ask:

  • How are consumers responding to inflationary pressures, and what does it mean for retailers and brands?
  • Will price dynamics settle consumer demand?
  • How can companies mitigate the impact of inflation?

In the previous edition of the EY US Future Consumer Index, we explored whether the market drives consumers, and thus companies, to change, or if it is, in fact, consumers who are in the driver’s seat. It’s a question many companies are asking themselves now as geopolitical and market pressures mount. In this edition of the Index, we dig deeper into the consumer impact of one of today’s most impactful market dynamics: inflation.

Inflation is at its highest level in the US in 40 years. The push and pull of pent-up demand and constrained supply and labor have fueled a combustion of price. Consumer goods and retail companies were already feeling the squeeze from increased input costs for everything from energy and transportation to raw materials and commodities. As these input costs increase, so does price inflation, only to be further exacerbated by the volatile geopolitical landscape.

Now, as input costs rise faster than pricing increases, where do consumers fit in this picture? How are they responding to the inflationary pressures, and what does it mean for retailers and brands?

Will price dynamics settle consumer demand?

We’ve seen it on the grocery shelf, on our restaurant bill and at the pump as of late – a rise in the total cost of our purchases. And, while early incremental price increases may have gone unnoticed, the larger, and likely permanent, spikes in the cost of everyday essentials will likely temper the COVID-19-fueled, pent-up demand from consumers. Why?

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Price dynamics vs. consumer demand

50%

of US consumers say rising costs of goods and services are making it hard to afford things

Increased price sensitivity may push demand even lower as consumers seek out value to justify cost. Of the five future segments, Affordability First remains the largest segment for another quarter. Further, 58% of US consumers say that price is the most important purchase criterion now, second only to product availability (60%). As consumers look ahead, price bubbles to the top, with 64% citing it as the most important purchase criterion in three years’ time.

Digging deeper into price sensitivity

Certain categories fare better in high inflationary environments than others. Necessities, like gas and food, while still subject to price sensitivity, are less susceptible than the nice-to-have categories, like apparel. Across many of the necessity categories, consumers say that they have not changed purchases due to price increases, and they are bracing for, and have accepted, the fact that those prices will likely continue to rise.

However, areas of nonnecessities are not as price-proof, since higher percentages of consumers are willing to purchase fewer, cheaper alternatives, or none at all, as prices continue to rise.

So, how can consumer-facing companies cope with this fluctuation of price and demand?

Mitigating the impact of inflation

Though inflation will not likely peak until later this spring as higher commodities prices push it even higher in the near term, we do anticipate a settling of things to come. With that in mind, how reactive and permanent, should consumer-facing companies’ response be?

The best course of action is to take near- to medium-term actions to mitigate the impact of inflation.

  • Exercise pricing power

    One of the primary mitigation tactics that most consumer goods companies are employing is exercising their pricing power. CFOs across CPG companies have pointed to raising prices as a key way to protect their margins.

     

    It’s a delicate balance, though, as we’ve seen with the price sensitivity sentiments exhibited by consumers. There is a threshold where consumers will no longer take on price, and companies would do well not to exceed it by using scenario model managing pricing based on real-time demand and supply dynamics.

  • Protect margins

    In response to the impacts of COVID-19, we discussed five things consumer goods companies should consider. The efforts around margin protection still ring true in a high inflationary environment:

    • Hedging and future commodity price management: Increased transparency on hedging methods and alignment with finance and supply chain leaders can drive tangible benefits quickly.
    • Procurement contract review: Supplier contract adherence to penalties and incentives for pricing continuity and material availability can preserve margin gains.
    • Converting earnings to cash flow: Companies can also take a page from the Kellogg Company CFO’s handbook. Kellogg has focused on refreshing and enhancing data-driven capabilities in revenue growth management.
    • Automate forecasting: Artificial intelligence (AI) can support forecasting and decision-making that directly impact margin enhancement and cash conversion.

    CFOs are also taking cost-cutting measures in other parts of the business, like advertising spend, reducing operating expenses and rationalizing product SKUs.

  • Invest in productivity gains

    While some consumer goods companies and retailers may rely on using the levers of revenue growth management to drive efficiency, some are investing in technology to drive efficiency, speed and agility:

    • Accelerate the use of automation: Use AI for demand forecasting, leveraging automation and robotics in manufacturing facilities and distribution centres to drive efficiencies.
    • Modernize systems: Upgrade legacy systems to drive more speed and agility. 

Summary

Today’s high inflationary environment will not soon pass; however, there are strategies that consumer goods companies and retailers can take to navigate through it. What remains is how the consumer will respond to those strategies. The costs of goods and services has, and will continue to have, a marked impact on not only consumer demand, but also long-term sentiments around price sentiment. Companies must walk the tightrope of meeting consumers’ needs around price and managing the cost pressures in their wake.

About this article

Kathy Gramling
By Kathy Gramling

EY Americas Consumer Industry Markets Leader

25-year consumer products and retail veteran. Integration and teaming advocate. Passionate mentor and transformative leader. Wine enthusiast.

Related topics Consumer products and retail FutureConsumer.Now COVID-19 Customer Transforming retail
Upvote