How fmcg players are managing the triangle of inflation, pricing and elasticity

With both Eurozone and UK inflation reaching more than 4% in October, the cost squeeze is really starting to bite. The Bank of England expects the situation to get worse before it gets better, forecasting 5% inflation by spring next year.

We are starting to see pricing really coming through in companies’ results. Unilever’s pricing more than doubled to over 4% in Q3 and we expect it to continue rising to more than 5% in the next few quarters. While pricing really stepped up in its emerging markets, it was also notable that European pricing accelerated to more than 2% and US pricing to 3%, compared with flat or negative pricing only a few quarters earlier. In many parts of Continental Europe, there is only one pricing window a year, and it is clear there are a queue of suppliers who will be looking for chunky increases. We wouldn’t be surprised to see as much as 5% food price rises in Europe in 2022.

In the US, for most companies it has been more straightforward to take pricing with very limited volume reaction. There has been a perception that P&G has moved slower on pricing than peers, but recent data shows it is right in line with the HPC average (+4%).

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By and large, pricing has come through and the volume elasticity and market shares have held up. Managing the triangle of inflation, pricing and elasticity remains a top priority for all fmcg players, and so far this balance has been largely achieved. This ought to provide some confidence that margins should hold up looking into next year.

In the past, some price rises have been good news. More of the growth in recent times has come from mix and premiumisation, but if more pricing and volume still holds, this is a cocktail for strong top-line growth. We would expect industry pricing to peak in H1-22 before normalising in H2-22, but in general pricing is likely to remain sticky.

Nestlé CEO Mark Schneider has said the issue is not that there is inflation, but how quickly deflation turned into decade-high inflation. It was the speed of the change that took the industry by surprise. However, once they know what inflation to expect, the industry and Nestlé can adjust. This will be of little comfort to consumers, though.