Nestlé feels the pinch from budget-conscious shoppers while P&G holds firm on pricing

The insight: Quarterly earnings from Nestlé and Procter & Gamble presented two very different pictures of the US consumer.

• From Nestlé’s perspective, demand is softening even with promotional efforts, due to increased price competition and consumers’ tight focus on value.
• P&G, on the other hand, reported US volume growth in 8 of 10 categories despite holding firm on prices, and the company isn’t seeing signs of trade-downs to cheaper private labels.

P&G holds the line: Part of the explanation for the diverging fortunes of the two companies stems from the fact that the categories P&G sells are generally more resistant to trade-down behaviors, due to the high “cost of failure” for products like diapers and detergent. Shoppers “are willing to pay the few-pennies premium per use in order to have the reassurance that the product actually works,” CFO Andre Schulten said at a Barclays conference in September.

The company also developed a portfolio with different pricing tiers to appeal to consumers of all budgets, allowing it to keep value-focused shoppers in the fold while capitalizing on affluent shoppers’ demand for more premium products.

• That enabled it to largely avoid ramping up promotions, which other CPGs (including Nestlé) are relying on to boost sales, and stick to its pricing strategy.
• “There’s no desire on our side, and I don’t think there’s any pressure from consumers, to adjust pricing” in the US, Schulten said following the company’s Q3 earnings release.

Shoppers stick to private labels: Nestlé has the more difficult task of winning back shoppers who may have initially turned to private labels to save money on grocery purchases, but continue to buy them due to improved quality and selection.

• 4 in 5 shoppers believe the quality of private label food brands is as good as or better than name brands, per an August Ipsos survey.
• Private labels are expected to account for 24% of grocery spending by 2030, up from roughly 20% today, per a report by the Alvarez & Marsal Consumer and Retail Group, as improvements in quality and product assortment—not to mention their lower price point—keep shoppers from returning to national brands.

Our take: CPGs face a challenging environment as they try to ward off growing competition from retailers and meet shoppers’ desire for value. While some, like P&G, are better protected thanks to a portfolio of products that consumers are less likely to trade down from, others, like Nestlé, are struggling to grow sales as price sensitivities outweigh brand loyalty.

Many CPGs took the industry’s headwinds as motivation to trim their portfolios and streamline operations—and Nestlé is likely to follow suit, as new CEO Laurent Freixe overhauls the company’s operations as part of his turnaround strategy. At the same time, CPGs must continue to invest in product innovation and marketing in order to find new ways to draw shoppers to their brands, and keep those customers loyal.

Go further: Read our report on US CPG Ad Spending 2024.