The news: Walmart Inc. said high food inflation was dragging down general merchandise sales, forcing the company to slash prices and revise down its profit outlook for Q2 and the remainder of 2022, per a company blog post.
Retailers are bearish: Walmart’s announcement echoed Target’s warning to investors last month about the drag that excess inventory would have on profits.
CPGs are bullish: While Walmart and Target warn of tougher times ahead, CPG companies including Unilever, The Coca-Cola Co., and PepsiCo are raising their revenue forecasts on the back of price hikes and continued demand for their products.
The value of brand affinity: CPG companies with significant brand equity in a given space—like PepsiCo and Coca-Cola have in the snack and beverage industries, and Unilever has in the ice cream and beauty categories—have more room to experiment with pricing because they know consumers have a strong affinity for their products. As the results have demonstrated, raising prices hasn’t hurt their bottom lines—quite the opposite, in fact.
On the other hand: The more CPGs raise prices, the more likely they are to come into conflict with retailers like Walmart that are doing as much as they can to keep prices for groceries and other necessities as low as possible.
The big takeaway: Even as consumers cut back on physical goods, they’re spending more on out-of-home experiences like travel and dining out. That’s a good sign for Coca-Cola and Unilever, both of which have strong away-from-home businesses, but growth will be difficult to sustain once consumers burn through the last of their pandemic savings and interest rates go up.
Retailers face a more difficult situation. Steep discounts might temporarily spur shoppers to buy, but at the expense of profits.