Investors target consumer goods makers on fears of customer exodus over
high prices
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[July 12, 2023] By
Richa Naidu and Jessica DiNapoli
LONDON/NEW YORK (Reuters) - Top U.S. and European investors are flagging
their concerns about high prices to consumer goods companies, with Janus
Henderson going so far as to cut some stakes it holds and shorting food
makers it believes are at risk of losing customers.
The industry, which is due to report second quarter earnings in the
coming weeks, has sharply hiked prices for over two years to make up for
soaring cost inflation that started with the COVID pandemic and worsened
due to shortages triggered by Russia's invasion of Ukraine and extreme
weather.
In the U.S., consumer prices rose 4% in the 12 months ending in May
while food inflation in the euro zone stood at 12.5% in May.
Consumer goods makers say the price hikes are necessary, and that they
have taken a hit to margins over the past two years. Some companies such
as Clorox have even begun to ease off the hikes to protect sales volumes
as input costs fall. Janus Henderson, one of the world's top investors
with over 250 billion pounds ($322.45 billion) in assets under
management, said it had already cut stakes in some food companies
because continued high prices could prompt a sharp fall in volumes they
sell. "In the U.S. in particular, these pressures are more acute than in
Europe," Janus Henderson portfolio manager Luke Newman told Reuters.
"There's a very real risk of volume falls, which could be very dramatic
in terms of revenue for these companies." In particular, the asset
manager is scrutinizing food manufacturers, including cereal makers,
Newman said.
"We've reduced our holdings to those categories and actually initiated
some short positions as well," he said.
Other investors, including Richard Marwood, a senior fund manager at
Royal London Asset Management, also said they were talking to consumer
goods firms about the impact of high prices on volumes.
San Francisco-based Parnassus Investments has been discussing trimming
its stakes in companies making household staples because the asset
management firm expects revenues to "decelerate," said Robert Klaber, a
portfolio manager.
Parnassus holds shares of P&G and Triscuit maker Mondelez, among other
consumer products makers and retailers.
In the U.S., some investors are worried that cuts to the food stamps
program for low-income earners and the reversal of the Biden
administration's student loan forgiveness plan will bite into consumers'
spending power.
U.S. consumer strength has begun weakening, "and that's bad news for the
consumer companies," Barclays analyst Iain Simpson said.
TRADING DOWN
With raw material and energy costs soaring over the past two years,
companies have minimized damage to profits and margins largely by
passing them on to retailers and shoppers.
Still, cost inflation has chipped away at margins, which have broadly
fallen 2-4 percentage points over the past two years for the consumer
goods industry. But, for some, they remain at a healthy 16-18% rate.
Price increases have in many cases come at the expense of sales volumes,
however, as shoppers "trade down" to cheaper private label alternatives
and smaller pack sizes.
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People shop in a supermarket as
inflation affected consumer prices in Manhattan, New York City,
U.S., June 10, 2022. REUTERS/Andrew Kelly
On average, median reported prices at the world's top 30 consumer
goods companies rose 11.2% in the fourth quarter of 2022, according
to restructuring consultancy Alvarez & Marsal, while median sales
volumes were down about 2%.
Sales volumes fell nearly 5% in the household & personal care sector
- where Procter & Gamble is No.1 - while food, beverages and alcohol
showed less dramatic declines.
'GREEDFLATION' ACCUSATIONS
Some lawmakers and regulators in the United States and Europe have
accused consumer goods manufacturers and retailers of price gouging
and "greedflation", or padding revenues by charging more than they
need to recoup high input costs.
David Chavern, CEO of the Consumer Brands Association, a trade group
that counts P&G and Clorox among its members, in response, says the
industry has "contended with a stream of unprecedented inflationary
pressures" since the pandemic.
"The resulting domino effect has spurred waves of impacts on
consumer costs that have been mischaracterized by some," he said.
"The reality is that our economy is still in a settling period, not
a deflationary one, that the industry is carefully navigating as it
continues working tirelessly to meet consumer demand."
The issue is an important one, and one for investors to talk to
companies about since "greedflation" prioritises short-term profit
over long-term consumer loyalty and sales, said Stephanie Niven,
portfolio manager of the Ninety One Global Sustainable Equity Fund.
"Relationships with consumers are coming under scrutiny, perhaps
into jeopardy and the long term competitive advantage of that
business, particularly if it rests on consumer brand loyalty, can be
very problematic," said Niven.
Irene Jensen, portfolio manager at Norway's sovereign wealth fund,
Norges Bank Investment Management, said she believes "there are some
companies who have probably been a bit opportunistic" and the
perception of price gouging is "potentially harmful."
"The risk now is that the consumer down-trades into private label,
gets to test out these products and then discovers that they're as
good as the brands or good enough for them," Jensen said, adding
that her team had raised concerns with companies.
Other asset managers argue the accusations of opportunistic price
hikes are unmerited.
"We will have to wait a few months or quarters till we know who's
right," said Thomas Joekel, a portfolio manager at Unilever and
Reckitt top-20 shareholder Union Investment, arguing that falling
margins at companies were proof that they were not gouging
consumers.
($1 = 0.7753 pounds)
(Reporting by Richa Naidu and Jessica DiNapoli; Editing by Matt
Scuffham and Deepa Babington)
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