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Back to price

23 December 2020 By Dasha Afanasieva

Consumer giants have reached peak “premiumisation”. Big producers of beer, cosmetics, even laundry liquid, have managed to grow in recent years by charging consumers more for fancier versions of everyday items. This has worked so far, but lower incomes in the post-pandemic recession will force groups like Unilever and Heineken to focus on volume while competing on price.

The consumer goods industry is all about using marketing and design to make humdrum products desirable and charging more for them. For example, the average price of a litre of beer brewed by Anheuser-Busch InBev, Heineken and Carlsberg rose around 3% in 2019, driving the bulk of the top line growth rates. Distiller Diageo has also focused on premium tipple: in 2018 it sold 19 more downmarket spirits brands like Romana sambuca, having snapped up pricey Casa Amigos from George Clooney.

It’s not just booze. British food, personal care and home company Unilever launched a new fancier detergent, saying premiumisation of the category was driving growth. It also bought The Laundress, which prices laundry liquid at a cool 20 pounds a bottle, for an undisclosed sum in 2019.

However, falling incomes in the aftermath of the Covid-19 pandemic, will hamper the strategy. The IMF estimates the global economy will contract by 4.4% in 2020. The World Bank expects global extreme poverty to rise in 2020, for the first time in more than two decades.

Dove maker Unilever is already seeing the impact: higher prices represented just over a tenth of the underlying growth rate in the third quarter of 2020, down from a third during 2019. Underlying growth still rose to a healthy 4.4% though, thanks to pandemic pantry hoarding and the company’s rotation to wallet-friendly products and bulk sizing. Its gross margin will feel the strain. U.S. competitor Procter & Gamble saw premium brands diminish as a growth driver too, in the three months to September.

Some affordable luxuries – such as expensive skin creams that bring joy when fancy holidays are off the list – will endure. This so-called “lipstick effect” is only partly marred by widespread face mask adoption. But for the rest, consumer giants will feel more pressure from supermarket substitutes. Putting lipstick on everyday household and food items will be a struggle in 2021.


(This is a Breakingviews prediction for 2021. To see more of our predictions, click here.)

 

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