Consumer goods companies navigate price competitiveness in a cooling market

As consumer spending decreases from a hot spring economy to cooler sustainable levels, consumer goods companies have the challenge of determining the right pricing for their products.

In the RSM US Middle Market Business Index survey, 49% of executives said they had passed along higher costs to consumers in the third quarter and 63% said they intended to do so in the next six months. As disposable income has decreased along with a cooling job market, consumers have become more price-sensitive. Consumer goods producers need to be innovative with products to stand out from their competition, as well as invest in infrastructure and technology to reduce costs and increase productivity, allowing profitable margins on tighter pricing.

Inflection point

Previously, supply chain disruptions and restricted activities during the pandemic generated a lot of pent-up demand. As a result, over the past several years, increased savings from consumers have led to hot consumer spending, inflation and higher costs for businesses.

This increased demand allowed businesses to both increase their prices for lack of supply and hire more workers to produce more volume. The lack of available labor was further stressed as a larger percentage of people over 55 chose not to return to the labor market than typical, starting in March 2020, according to the Schwartz Center for Economic Policy Analysis. This led to generational low unemployment and higher employment costs.

This is beginning to change. Average weekly wage growth cooled to 3.4% in September 2024, according to the U.S. Bureau of Labor Statistics (BLS). Additionally, nonfarm hiring added 114,000 jobs in July, well below the monthly average of 215,000 over the prior 12 months, leading to an increased unemployment rate that then rebounded somewhat to 4.1% after 254,000 jobs were added in September according to the BLS. These changing market conditions have contributed to consumer goods seeing a reduced rate of inflation, and even negative inflation in select categories of core goods, according to Bloomberg.

While consumer spending and the labor market remain strong, conditions are normalizing from elevated levels. Consumer goods companies need to understand and adjust to these changing conditions. 

Over the past few years, consumers have been willing to accept prices higher than expected, due in part to a lack of available inventory, as well as increased savings and pandemic era tax credits. Now, items with previously low availability due to supply chain constraints have become obtainable, providing customers with choice. Additionally, even as inflation has decreased, higher prices have led customers to become increasingly price-sensitive, requiring businesses to slow price increases and offer discounts.

Businesses that enjoy more dominant market share in certain sectors will find it easier to control prices. Other businesses and sectors are increasingly seeing customers choose value over brand in mass markets and buying down to meet their price expectations. This puts pressure on middle market labels to distinguish themselves.

While supply chain delays have largely disappeared for most inputs, costs are still elevated. Ocean freight container rates from the Far East to the U.S. have risen more than 20% since May. According to Xeneta, companies may be building up inventory in case unexpected disruptions occur. It remains imperative that companies develop robust supply chains to protect their sales and margins.

Consumer goods companies need to be innovative with the products they sell to differentiate themselves from their competition. This includes focusing on new-product initiatives and advertising. As the Federal Reserve decreases interest rates and company cash flows are unlocked, businesses should invest in capital expenditures to increase productivity and sell more volume.

Consumer goods sectors will see different demand curves

Customers are changing their buying habits, shifting away from purchases aimed at improving their experience at home to those that enhance their social activities. New-product inventory should focus on these changing interests.

During the pandemic, home improvement and TV products were in high demand. As people have returned to work and other group activities, interests continue to shift. Seventy-six percent of U.S. consumers say they plan to spend more on beauty, apparel and footwear this year, according to MMGNET.

Additionally, consumers are traveling more, including abroad, buoyed by a strong dollar compared to other currencies and demand left over from being cooped up during the pandemic. This means apparel, cosmetics, skin care and other travel-related sectors are seeing renewed demand.

Meanwhile, the housing market experienced an unimpressive first half of the year amid low inventory and mortgage rates as high as 7%, according to Freddie Mac. However, this too is changing. Even before the Federal Reserve cut interest rates by 50 basis points in September, yields on 10-year Treasurys dropped in anticipation of cuts, sending mortgage rates plunging. This, along with future interest rate cuts, will accelerate the already increasing inventory levels and lead to increased home sales. Home goods and home improvement companies will benefit as customers who deferred larger discretionary purchases begin to spend.

Buying experience

In addition to looking for the right product at the right price, consumers are sensitive to the right buying experience. Consumer goods companies that provide convenience, meeting consumers the way they want to buy, will outpace competitors.

Specifically, even as shoppers are increasingly buying online, maintaining products in brick-and-mortar stores has symbiotic benefits. According to research by ICSC, opening a physical store boosts online sales in the area around that location by 6.9%.

Conversely, closing a store reduces online sales in the area by 11.5%. Additionally, according to the research, brick-and-mortar stores build brand awareness by allowing customer interaction with products, in-store pickup and returns, and in-person customer service.

Since 2019, “buy now, pay later” options have seen rapid growth in transaction volume and attention from consumers. According to survey data the Consumer Finance Institute collected between January 2023 and February 2024, the most frequently cited reason for using this payment method was convenience and a general preference for paying this way. Providing customers with multiple ways to pay removes one more barrier to making a sale.

Finally, delivery conveniences born during the pandemic have not only persisted but grown. Customers now expect home delivery of categories of items that were traditionally bought only in stores, such as groceries, eyeglasses, workout equipment, shoes, mattresses, and even plants