(Bloomberg) -- It sounds counterintuitive, but companies are increasingly pushing premium products as the highest inflation in decades squeezes shoppers’ budgets.
The likes of Procter & Gamble Co. and Clorox Co. say it’s worth splurging for high-end personal-care and household goods that perform better, such as laundry detergent formulated for cold water. Their marketing suggests hard-earned dollars shouldn’t be wasted on substandard products, especially when everything already costs more.
Upselling is one strategy that manufacturers are using to protect profits as expenses skyrocket for fuel, labor and raw materials. Premium items not only cost more, but they also typically have better margins for companies. It’s a long-term strategy that has gained prominence as inflation persists.
“When they have a limited wallet, consumers can’t afford to wash their clothes three times,” Clorox Chief Executive Officer Linda Rendle said in a recent interview. “They can’t afford for a wipe to fail and then their family to get sick. They can’t afford for their charcoal not to light. We tend to see our brands be very resilient in these times.”
Other high-end products are touted as being better for the environment or easier to use. Clorox says sales have been strong for its new premium disinfecting mist with a reusable sprayer that the company claims reduces waste. P&G this year launched a version of its Dawn dish soap with an inverted bottle and no flip cap, which helps users squeeze out “every last drop.”
Upselling worked through the early part of the pandemic, but now it faces a new challenge with the rise of inflation and the lack of government subsidies that bolstered spending last year. In 2020 and 2021, sales of premium non-food items gained market share in their categories on a dollar basis, according to data provider IRI. Premium growth slowed in the first quarter of 2022.
US consumers have so far shown they’re willing to pay higher prices, even if it means dipping into savings or loading up on credit cards to support purchases.
‘Mainstream’ or ‘Premium’
IRI defines “mainstream” products as brand-name goods with prices no more than 25% above or below the category average. Anything more expensive is considered “premium.” Premium items accounted for 35.6% on non-food dollar consumer packaged goods sales in the first quarter, compared with 33.8% for mainstream products. Store brands are tracked separately.
In the first three months of the year, shoppers spent more money on premium dish detergents, sleep remedies and paper towels compared with a year earlier, according to IRI. At the same time, they switched to cheaper brands for things like pet treats, trash bags and skin care. The data provider says customers are opting for fancier products in categories where they perceive they’re actually getting a tangible benefit for the higher price.
For example, P&G says its cold-wash Tide laundry detergent takes half the energy of using warm water. At Walmart.com, the cold-water detergent is about 10% more expensive per load than the original version.
“We’re communicating to the consumer, ‘if you switch from hot water to cold water, the energy saving effectively offsets the cost of the detergent,’” P&G Chief Financial Officer Andre Schulten said last month.
Of course, not every shopper can afford to pay more. The Federal Reserve said June 1 that more than half of metro areas are seeing some pushback to higher prices, such as smaller purchases or switching to cheaper brands.
IRI expects spending to diverge further as some consumers demand premium goods while others seek value. Companies were quick to tout on recent earnings calls that they offer a wide range of product tiers and price points. P&G, for example, says it has built a larger presence at US dollar stores to connect with budget-minded shoppers.
Still, manufacturers have been advertising premium goods more lately in part because they need to show their products are worth it as they raise prices, Barclays Plc consumer goods analyst Lauren Lieberman said.
US shoppers paid 8.3% more for housekeeping supplies in April versus a year earlier, the largest increase since October 1981, according to the Bureau of Labor Statistics. Personal-care products cost 2.1% more, the biggest yearly jump in almost 10 years.
At Kimberly-Clark Corp., CEO Michael Hsu says he wants to “elevate” the company’s products, which include Kleenex tissues, Huggies diapers and Cottonelle toilet paper. Premiumization is driving growth, he said.
©2022 Bloomberg L.P.
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