High-end products take priority as businesses battle cost of living

“As we create more premium beverages, it becomes more difficult for customers to replicate them at home and we believe this contributes to the concept of trade down,” said Starbucks Chief Financial Officer Rachel Ruggeri. , to CNBC’s “Squawk Box” on August 3.

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Personalized coffees, “prestige” skincare, and “elevated” sauces and spreads are just a few examples of how companies like Starbucks, Unilever and Kraft Heinz are focusing on premium products – and consumers seem to like it.

But why are companies focusing on their more expensive deals as consumers feel the effects of the biggest inflationary shock in decades?

“Knowing your customers is key for consumer businesses as pressure on the cost of living tightens,” Paul Martin, UK head of retail at KPMG, told CNBC.

“While it’s true that some consumers increasingly have to turn to value products and watch every penny, it’s also true that other consumers are nervous about the economic outlook but still have cash. to spend and are mostly moving towards high-end products,” said Martine.

“For example, swapping meals for premium meals. While this group will also be looking to save money through the essentials, they will not fill the basket with them alone,” he said.

“An offer worth paying for”

Starbucks saw record numbers of customers and sales last quarter, beating Wall Street expectations. The results seem to reaffirm the view that some customers do not decrease or reduce their spending despite the rising cost of living.

Custom product design is key to increasing customer engagement even when money is tight, Starbucks Chief Financial Officer Rachel Ruggeri told CNBC’s “Squawk Box” Aug. 3.

“As we create more premium beverages, it’s harder for customers to replicate at home and we think that helps with the concept of down commerce,” Ruggeri said. “It can mean that a customer might not come in as often, but we want to make sure we have reasons for customers to come into 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 customization, which is a choice, and what we’ve seen so far is that our demand is strong. And that tells us we have an offer that’s worth buying. to get paid,” she said.

A focus on premium products isn’t unique to America’s largest coffee chain

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

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

The introduction of higher-end products comes on top of classic product redesigns, according to the company’s US president, Carlos Abrams-Rivera.

“One of the goals is how to optimize formulas to bring in cheaper ingredients,” Abrams-Rivera told CNBC’s “Squawk Box” on July 28. “And how do we customize our products for different consumers so they can access different products at different prices.”

Walking a similar path is Mondelez. The company announced an agreement in June to acquire bio-focused Clif Bar & Company, while all of the company’s acquisitions in 2021 – Hu Master Holdings, Lion/Gemstone Topco and Gourmet Food Holdings – have been described as “premium in its second quarter earnings report. .

“Value faces a boom, as does premium”

Unsurprisingly, consumers also depend on cheaper products, which companies are also sensitive to.

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

Other companies seek to appeal to both ends of the market by focusing on higher priced and lower priced products.

Nestle CEO Mark Schneider told investors on the company’s half-year earnings call that this approach had been used before.

“What we’re seeing with the current situation is similar to what’s happened in previous economic downturns and downturns,” Schneider said. “We pay attention to high-end products, but we also pay attention to affordable products. By covering both ends of that spectrum, we do well and meet those needs.”

Attracting 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, as is premium. Supermarkets recognize this, including discounters, who are expanding their core value ranges, but also strengthening their premium offering. Their goal is to capture and to keep the overall trade-down in viewership,” Martin said.

Boost desirability and sales

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

“The higher end ranges in our portfolio are actually doing very well… We’re seeing some price reduction – it’s on pack sizes, where people are moving to more affordable formats,” he said. declared on July 26.

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

Described as “a string of pearls” by Executive Vice President and Group CEO Vasiliki Petrou in December, the model relies on “a certain level of rarity” to drive desirability and sales.

So far it seems to have worked. Beauty and personal care rose 7.5% last quarter, driven by “strong growth” in prestige beauty and health and wellness, according to the company’s second quarter 2022 earnings announcement. the society.

Focusing on high-end products may also be a more palatable way to combat inflationary costs than reducing items or packaging sizes, according to Kristina Rogers, global consumer leader at EY.

“There is a limit to these actions and as input costs continue to rise, companies are looking to increase the value of their products,” Rogers told CNBC.

“So the only way to grow is to take the high-end, value-added route. Companies need to demonstrate the added value of their brands and give consumers a good reason to buy more expensive products,” he said. said Rogers.

“Companies focus on increasing their product features to extend consumers’ willingness to pay. These features include brand building, higher quality products, durability, or health features, to help validate a higher premium to charge,” she added.

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