“As we make more premium drinks, it’s going to be harder for customers to replicate it at home, and we think that helps with the concept of commerce,” Starbucks CFO Rachel Ruggeri told CNBC’s “Squawk Box” on Aug. 3.
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Personalized coffee, “prestige” skincare and “lofty” sauces and spreads are just a few examples of how companies like Starbucks, Unilever and Kraft Heinz are shifting their focus to premium products – and consumers seem to love them.
But why are companies zooming in on their more expensive offerings when consumers are feeling the effects of the biggest inflation shock in decades?
“Customer insight is critical for consumer businesses as the cost of living tightens,” Paul Martin, KPMG’s UK Head of Retail, told CNBC.
“While it is true that some consumers increasingly have to turn to high-value products and watch every penny, it is also true that other consumers are nervous about the economic outlook but still have money to spend and are essentially trading premium products, ‘ said Martin.
“Exchange meals for premium meals in them, for example. While this group also wants to save money through the essentials, they won’t just fill the basket with them,” he said.
‘An offer worth paying for’
Starbucks reported a record number of customers and sales in the last quarter, exceeding Wall Street expectations. The results seem to confirm the view that despite the rising cost of living, some customers are not trading or reducing their spending.
Designing custom products is key to increasing customer engagement, even when money is tight, Starbucks CFO Rachel Ruggeri told CNBC’s “Squawk Box” on Aug. 3.
“Because we’re making more premium drinks, that’s harder for customers to replicate at home, and we think that helps with the trade-in concept,” Ruggeri said. “It could mean that a customer might not come as often, but we want to make sure we have reasons for the customers to come to the stores and contact us.”
Giving customers more flexibility also allowed for more expensive products to be sold and higher costs to be passed on, 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 high. And that tells us we have an offer 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 the 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 transportation, labor and ingredient costs amid rising inflation.
According to US President Carlos Abrams-Rivera, the introduction of more premium products comes alongside the redesigns of classic products.
“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 different consumers so that they can access different products at different price ranges.”
Walking a similar path is Mondelez. The company announced a deal in June to acquire organic-focused Clif Bar & Company, while all of the company’s 2021 acquisitions – Hu Master Holdings, Lion/Gemstone Topco and Gourmet Food Holdings – are in its second-year earnings report. quarter were described as “premium”. .
‘Value represents a boom and so does premium’
It is not surprising that consumers are also dependent on cheaper products, which companies are also sensitive to.
For example, McDonald’s attributed some of its growth in the US to its value products in its Q2 2022 earnings report.
Other companies try to attract both sides of the market by focusing on more expensive and cheaper products.
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 previous economic slowdowns and downturns,” Schneider said. “We pay attention to premium products, but we also pay attention to affordable products. By covering both ends of this spectrum, we are doing well and meeting those needs.”
Reaching the widest possible customer base is the key to sustaining and growing profits in the current economic climate, according to Martin of KPMG.
“In this landscape, value is booming and so is premium. Supermarkets, including the discounters, are recognizing it, expanding their core value reach, but also strengthening their premium proposition. Their goal is to make all commerce less public,” said Martin.
Stimulating 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 ranges in our portfolio are actually doing really well… We’re seeing some downtrading – that’s on the pack size, where people are moving to more affordable sizes,” 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 Executive VP and Group 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 & Personal Care grew 7.5% in the last quarter, driven by “strong growth” in Prestige Beauty and Health & Wellbeing, according to the company’s Q2 2022 results announcement.
A focus on premium products can also be a tastier way to tackle inflation costs compared to reducing items or package sizes, according to EY, global consumer leader Kristina Rogers.
“There is a limit to these actions and as input costs continue to rise, companies are looking at how to increase the value of their products,” Rogers told CNBC.
“The only way to grow is therefore to go the premium and value-added route. Companies need to demonstrate the added value of their brands and give consumers a good reason to buy more expensive products,” Rogers said.
“Companies focus on improving their product’s features to increase consumers’ willingness to pay. These features include brand building, higher quality products, durability or health features, to help validate a higher premium,” she added.