Branded companies are off to a good start – but worries remain

At the same time, manufacturers suffered from the fact that many consumers switched to cheaper private labels for everyday goods due to the high cost of living.

Do the latest figures indicate a trend reversal in the consumer goods industry? “We are heading back towards a normalizing growth picture,” says analyst Eamonn Ferry from the Swiss bank Credit Suisse.

Many branded companies increased their sales in 2022 mainly by pushing through price increases. But the sales figures went down. Henkel, for example, sold a good six percent fewer detergents and cleaning agents in 2022.

The decline in volume can also be explained by the tough price negotiations between manufacturers and dealers, which led to delivery stops and delistings. For example, the products of 17 consumer goods manufacturers are missing in whole or in part at Germany’s largest food retailer Edeka.

Germans are spending more money again

In the first quarter it is noticeable that the companies still increased their revenues primarily through higher prices. However, the quantities did not fall as sharply as they had recently. The British consumer goods group Unilever sold 0.2 percent fewer goods, observers had expected a drop of more than three percent.

Analyst Ian Simpson from the major British bank Barclays also explains this by saying that there are currently significantly fewer delistings and delivery stops in retail than recently. Bruno Monteyne, an analyst at Bernstein Bank in London, adds: “The message is similar for all consumer goods manufacturers: They can right now increase their prices without a major impact on volumes.”

One reason for this is the increasing willingness to consume. In April, the market researcher GfK identified an increase in the consumer climate in Germany for the seventh month in a row. The index is now at minus 25.7 points. Thus, for the first time, consumer sentiment is better than at the beginning of the war.

This is also due to the political aid programs, which at least partially compensated for the high energy prices. “Together with the expected increases in income under collective agreements, more and more households are assuming that the high losses in purchasing power they originally feared will be significantly milder,” write the GfK market researchers.

Firms remain cautious

It is still too early to give the all-clear. The willingness to buy is still well below the values ​​from before the pandemic, when the index was almost plus ten points. The first branded companies such as Beiersdorf and Danone have increased their sales forecast. Henkel and Unilever are now targeting at least growth at the upper end of their targets.

But many companies remain cautious. “However, whether the industry as a whole will move forward again depends on further macroeconomic developments,” says Henkel CEO Knobel.

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The food giant Nestlé continues to expect organic sales growth of six to eight percent. “We are seeing consumption volume in negative territory in some markets, particularly in Europe,” said Nestlé Chief Financial Officer Francois-Xavier Roger.

Other branded companies also rate the mood of European consumers as weaker than in other regions. “Demand in Europe remains sluggish, but at least it’s not deteriorating anymore,” says Credit Suisse analyst Ferry. Private labels would hardly gain market share. According to GfK, no-name products accounted for 46 percent of sales in Germany in the first quarter, compared to 42.3 percent a year ago. There had never been a boom like this before.

Brand owners hope that consumers will switch back to their products as the economy eases. “Consumers have always moved towards private labels in times of macroeconomic crisis,” says Henkel CEO Knobel. When the economic situation returned to normal, this corrected itself.

Brand owners face a dilemma

However, that depends on the price difference between branded goods and no-name products. Large retailers such as Aldi and Edeka have already announced that they intend to lower the prices for their own brands again in the foreseeable future.

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This increases the pressure on branded companies. These have often held out the prospect of further price increases for this year. According to their own statements, many companies have not yet succeeded in compensating for all of their cost increases from the previous year. That puts pressure on the margin.

Brand owners face a dilemma: if they continue to raise prices to cover costs, many customers are likely to continue to rely on private labels. However, if they do not adjust prices further, it will become more difficult to achieve the profit margin from before the crisis.

In terms of costs, companies are at least not expecting a further deterioration. But: “It is far from certain that there will be deflationary pressures in the second half of the year,” said Unilever boss Alan Jope.

Henkel forecasts an increase in spending on raw materials and materials in the mid-single-digit percentage range, and the peak in cost increases has been reached. CEO Knobel, however, points to increasing cost pressure when it comes to salaries.

Barclays expert Simpson also predicts this: “Together with a probable increase in promotional activities, this will probably limit growth in margins.” Many consumer goods companies keep their profit figures under wraps when the quarterly figures are released.

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