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Business

Premium products are prioritized when companies struggle with the cost of living




“As we create more premium beverages, it becomes harder for customers to replicate that at home, and we think that helps with the concept of switching down,” Starbucks CFO Rachel Ruggeri told CNBC’s “Squawk Box” on Aug. 3.

Gary Hershorn/Contributor/Getty Images

Personalized coffee, “prestige”[ads1]; skin care and “elevated” sauces and toppings are just a few examples of how companies like Starbucks, Unilever and Kraft Heinz are tilting their focus towards premium products – and consumers seem to love it.

But why are companies zooming in on their more expensive offerings when consumers are feeling the effects of the biggest inflationary shock in decades?

“Customer insight is key for consumer businesses as cost-of-living pressures tighten,” Paul Martin, KPMG’s UK head of retail, told CNBC.

“While it is true that some consumers are increasingly turning to value products and watching every penny, it is also the case that other consumers are nervous about the economic outlook but still have money to spend and are essentially shopping down to premium products , ” Martin said.

“For example, replacing meals with premium meals in. While this group will also look to save money via the valuables, they won’t just fill the basket with them,” he said.

“An offer worth paying for”

Starbucks reported record customer numbers and sales last quarter, beating Wall Street expectations. The results seem to confirm the view that some customers are not shopping down or reducing their consumption despite the rising cost of living.

Designing customized products is key to increasing customer engagement even when money is tight, Starbucks CFO Rachel Ruggeri told CNBC’s “Squawk Box” on Aug. 3.

“When we make more premium beverages, it’s harder for customers to copy at home, and we think that helps with the concept of switching down,” Ruggeri said. “It might mean that maybe a customer doesn’t come as often, but we want to make sure we have reasons for customers to come into the stores and interact with us.”

Giving customers more flexibility also helped sell more expensive products and pass on higher costs, Ruggeri said.

“We’ve been able to do that through our personalization, which is a choice, and what we’ve seen so far is that our demand is strong. And that tells us that we have an offering that’s worth paying for,” she said.

The focus on premium products is not unique to the largest coffee chain in the US

Kraft Heinz is entering the luxury market with the launch of its HEINZ 57 collection in July. The “chef-inspired” spices are “designed to add magic to the culinary experience,” according to the company.

This came as the company raised prices by more than 12% in response to higher transport, labor and ingredient costs amid rising inflation.

The introduction of more premium products comes in addition to the redesign of classic products, according to the company’s US president Carlos Abrams-Rivera.

“One focus is how we optimize formulas to bring in ingredients that are cheaper,” Abrams-Rivera told CNBC’s “Squawk Box” on July 28. “And how do we adapt our products to the different consumers so they can access different products at different price points.”

Mondelez follows a similar path. The company announced in June a deal to buy organic-focused Clif Bar & Company, while all of the company’s 2021 acquisitions — Hu Master Holdings, Lion/Gemstone Topco and Gourmet Food Holdings — were described as “premium” in its second-quarter earnings report. .

“Value faces a boom and so does premium”

Not surprisingly, consumers are also dependent on cheaper products, which companies are also sensitive to.

McDonald’s, for example, attributed some of its growth in the US to value products in its Q2 2022 earnings report.

Other companies are looking to attract both ends of the market by focusing on higher and lower prices.

Nestle CEO Mark Schneider told investors in the company’s half-year results that the approach has been used before.

“What we’re seeing with the current situation is similar to what happened in past economic downturns and recessions,” Schneider said. “We emphasize premium products, but we also emphasize affordable products. By covering both ends of that spectrum, we do well, and we serve those needs.”

Appealing to the widest possible customer base is key to maintaining and growing profits in the current economic climate, according to KPMG’s Martin.

“In this landscape, value is facing a boom, and so is premium. Supermarkets recognize this, including the discounters, who are expanding their core values ​​but also reinforcing the premium offering. Their aim is to capture and retain all trade-down audiences, Martin said.

Driving desirability and sales

Unilever CEO Alan Jope told CNBC’s “Squawk Box” that the company saw a mix of customers trading up and down.

“The premium series in our portfolio are actually doing very well … We’re seeing some decline — it’s on pack size, where people are moving to less expensive formats,” he said on July 26.

In 2014, Unilever launched Prestige, a luxury arm of the conglomerate that now includes Dermalogica, Tatcha and Paula’s Choice.

Described as “a string of pearls” by group president and CEO Vasiliki Petrou in December, the model relies on “a certain level of scarcity” to drive desirability and sales.

So far it seems to have worked. Beauty and personal care grew 7.5% last quarter, driven by “strong growth” in Prestige Beauty and Health & Wellbeing, according to the company’s Q2 2022 earnings announcement.

A focus on premium products can also be a more palatable means of tackling inflationary costs compared to reducing goods or packaging sizes, according to EY’s global consumer leader Kristina Rogers.

“There is a limit to these actions, and given that input costs continue to rise, companies are looking at how to extend the value of their products,” Rogers told CNBC.

“Therefore, the only way to grow is to go the premium and added value route. Companies need to demonstrate the added value of their brands and give consumers a good reason to buy more expensive products,” said Rogers.

“Companies focus on increasing the features of their product to expand consumers’ willingness to pay. These features include branding, higher quality products, sustainability or health features, to validate a higher premium to be charged,” she added.



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