Premium products take priority as companies struggle with cost of living

“As we’re making more premium drinks, it’s getting harder for customers to replicate at home and we think that helps with the concept of lower commerce,” Starbucks chief financial officer Rachel Ruggeri told CNBC’s “Squawk Box” August 3.

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Custom coffee, “high-end” skincare and “high” sauces and secrets are just some examples of how companies like Starbucks, Unilever and Kraft Heinz tend to focus toward premium products — and consumers seem to love them.

But why are companies focusing on their higher-priced offerings when consumers are feeling the effects of the biggest inflation shock in decades?

“Customer visibility is key to consumer businesses as the cost of living shrinks,” Paul Martin, head of retail at KPMG in the UK, told CNBC.

“While it is true that some consumers are increasingly having to turn to value products and watch every penny, there is also anxiety among other consumers about the economic outlook but still have money to spend and they are essentially trading premium products,” Martin said.

“For example, swapping out meals for premium meals in. While this group will also be looking to save money through core value, they will not just fill the basket with it alone,” he said.

“An offer worth paying for”

Starbucks reported record numbers of customers and sales last quarter, beating Wall Street expectations. The results seem to reaffirm the view that some clients do not trade or spend less despite the higher cost of living.

Customizing products is key to increasing customer engagement even when money is tight, Rachel Ruggeri, Starbucks’ chief financial officer, told CNBC’s Squawk Box program on August 3.

“As we create more premium drinks, it is difficult for customers to replicate at home and we think this helps with the concept of low trade,” Ruggeri said. “It could mean that the customer might not come as frequently, 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 at higher costs, Ruggeri said.

“We’ve been able to do this with our customization, which is an option, and what we’ve seen so far is that our demand is strong. And that tells us we have an offer that’s worth paying for,” she said.

The focus on premium products isn’t limited to the largest coffee chain in the US

Kraft Heinz enters the luxury market with the launch of the Heinz 57 range in July. The “chef-inspired” seasoning is designed to “add charm to the culinary experience,” according to the company.

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

The introduction of more premium products is in addition to a redesign of classic products, according to US President Carlos Abrams Rivera.

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

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

“Value is facing a boom and so are the premiums.”

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

McDonald’s, for example, attributed some of its growth in the United States to its valuable products in its second-quarter 2022 earnings report.

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

Mark Schneider, chief executive of Nestlé, told investors in the company’s semi-annual earnings announcement that this approach had been used before.

“What we see in the current situation is similar to what happened in the previous economic slowdown and recession,” Schneider said. “We pay attention to premium products but we also pay attention to affordable products. By covering both ends of this range, we are doing well and meeting these needs.”

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

“In this landscape, value experiences a boom as well as premiums. Supermarkets, including discounters, are expanding their core value ranges, but also enhancing their premium offerings. Their goal is to get and keep all the trade,” Martin said.

Increase interest 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 premium ranges in our portfolio are doing very well,” he said on July 26. “We’re seeing some pullback — and that’s on package size, as people move to more affordable formats.”

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

Described as a “string of pearls” in December, Executive Vice President and CEO Vasiliki Petrou, 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 products grew 7.5% last quarter, driven by “strong growth” in Prestige Beauty and Health & Wellbeing, according to the company’s second-quarter 2022 results announcement.

Focusing on premium products can also be a more acceptable way of tackling inflation costs than reducing item or package sizes, according to Christina Rogers, global consumer leader at EY.

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

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

“Companies focus on increasing the features of their products to expand consumers’ willingness to pay. These features include brand building, quality products, sustainability, or health features, to help verify a higher premium is charged,” she added.

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