Home care has traditionally been exposed to price sensitivity and downtrading at times of economic uncertainty. The rise of private label during the global financial crisis of 2008 showed that consumers are quick to rationalise their expenditure when faced with financial tensions. However, home care and its chemistry have played a central role in providing consumers with hygiene and safety during the Coronavirus (COVID-19) pandemic. While demand for home care has evidently slowed in 2022, following an unprecedented spike in sales at the height of the pandemic, many of the cleaning behaviours established during the long periods of home seclusion and restrictions on movement can be expected to remain, supporting a positive growth outlook for the industry. Procter & Gamble and Unilever have announced strong first quarter results, despite having increased product prices across their portfolios. The impact of these price increases on demand was smaller than expected, suggesting that home care has built some resilience to price-related effects of downtrading. It would be false to assume that the industry has become immune to the impact of economic uncertainty, and consumers in the lower-income brackets especially will be more cautious about their spending, but hygiene awareness is playing its part in reducing the impact of inflation on demand.
Stagflation poses risks to growth in home care
Global inflation is expected to surge to 7.6% in 2022 from 4.3% in 2021, as the global economy is facing strong headwinds from a combination of factors, resulting in inflationary pressure on both businesses and consumers. Euromonitor International has created a new macro scenario to account for the possibility of worse than expected global negative spillovers from the war in Ukraine, through uncertainty, confidence and supply constraints causing stagnant global economic growth combined with high inflation. With a probability of 27% in this stagflation scenario, more severe global economic stagnation paired with inflation spikes would inevitably lead to a less positive outlook for home care over the forecast period, downgrading its growth projections compared with its current forecast baseline.
Source: Euromonitor Industry Forecast Model
Home care highly exposed to price changes
Despite the pandemic having led to a renewed appreciation for home care and its categories, commoditisation continues to be an obstacle, with home care marked by relatively high price elasticity across the majority of its products, meaning that consumers react sensitively to changes in product pricing, exposing the industry to high levels of uptrading and downtrading. This can be attributed to the fact that many of the more sophisticated products within home care are easily substitutable with cheaper – and more basic – alternatives. While perceived as essentials by consumers, home care categories are typically highly exposed to price changes, due to their availability across different price segments; from bar detergents to liquid tablet detergents in laundry care, and from bleach to multipurpose cleaners to task-specific kitchen and bathroom cleaners.
Source: Euromonitor International
Input cost inflation is being passed on to the consumer
A big jump in the price of essential home care raw materials, such as crude and palm oil, as well as higher transport and packaging costs, have resulted in the squeezing of profit margins. In order to mitigate the impact on profitability, the industry has reacted by increasing product prices across portfolios.
The leading home care players, Procter & Gamble and Unilever, recently announced that they would further increase product prices across their home care ranges in a bid to circumvent the impact the increases in raw materials and production costs are having on their margins. This is seen as a necessity and a calculated risk. While as an immediate effect, these price increases led to a slowdown in consumption, with a knock-on effect on volume sales, for the time being, an upward adjustment of average unit prices is helping these companies to appease their shareholders and maintain their value growth projections. Increasing prices to cope with inflation, however, forces many households to reconsider their purchasing decisions and rationalise their expenditure, which creates a fine line between maintaining profitability and potentially losing long-standing customers.
Median Price Index of Essential Products: January 2020 – April 2022
Source: Euromonitor Price and Availability Tracker
Brand strategies towards sustained value growth
To counteract looming customer migration, a logical reaction of the leading brands is to try and strike a balance between increasing the prices of their products, while at the same time optimising their manufacturing processes, reformulating products based on materials availability and cost, and, if possible, shifting their raw materials sourcing across their wide supply networks.
Procter & Gamble’s strategy has also been to further invest in widespread marketing campaigns, putting an emphasis on the performance and cost-saving benefits associated with its product range. And, so far, its strategy seems to be working. According to a statement by the company’s CFO, Andre Schulten, during the company’s earnings call in April 2022, it is seeing “price elasticities – the consumer reaction relative to the increase [the company is] taking – to be about 20% to 30% more favourable than [they] would have assumed, based on historical data”, and the continued consumer focus on hygiene has certainly got a part to play in this, too.
Procter & Gamble launched various campaigns across the globe to encourage consumers to switch to cold washing, with the support of its Tide (in the US) and Ariel (in Western Europe) laundry care brands. The company claims that consumers can save up to 90% on energy consumption (and the energy costs associated with hot water washing) by washing their laundry in cold water, without having to compromise on wash performance when using its products.
The second largest home care manufacturer, Unilever, also reported a strong first quarter, as it increased its product prices by an average of 8.3%, achieving reputable value growth of 7.3% compared with the first three months of 2021, with volume sales dropping by as little as 1%. This can also be seen as being indicative of the trust consumers put in brands when they relied on their safety promises during the COVID-19 outbreak, re-establishing some of the brand loyalty that we saw diminishing in the years leading up to the pandemic.
It is not all doom and gloom for home care
In essence, home care will certainly not be spared the effects of inflation on expenditure, and supply chain constraints will cause problems for some time to come. However, hygiene will continue to be top-of-mind for consumers who lived through the pandemic years. This puts the industry and its chemistry in a strong position to mitigate the effects of inflation. Downtrading is set to hamper value growth, but the industry is forecast to maintain positive growth.