Premium products take precedence when companies struggle with the cost of living

“The more premium beverages we make, the harder it is for customers to replicate them at home, and we believe this helps the concept of trade down,” Starbucks CFO Rachel Ruggeri said Aug. 3 opposite CNBC’s “Squawk Box.”

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Personalized coffees, “prestige” skincare, and “upscale” sauces and spreads are just a few examples of how companies like Starbucks, Unilever, and Kraft Heinz are turning their focus to premium products — and consumers seem to love it.

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

“Customer insights are critical for consumer businesses as the cost of living falls,” Paul Martin, KPMG’s UK head of retail, told CNBC.

“While it’s true that some consumers are increasingly turning to value products and need to watch every penny, it’s also true that other consumers are nervous about the economic outlook but still have money to spend and are essentially switching to premium products. ‘ said Martin.

“Like swapping meals for premium meals domestically. While this group will also try to save money on the inexpensive essentials, they won’t fill the basket with just that,” he said.

“An offer worth paying for”

Starbucks reported record subscribers and sales last quarter, beating Wall Street expectations. The results seem to support the view that some customers are not saving or reducing spending despite rising living costs.

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

“The more premium drinks we make, the harder it is for customers to replicate this at home, and we believe this helps with the concept of trade down,” Ruggeri said. “That can mean that a customer might not come as often, but we want to make sure we have reasons why customers come into stores and interact with us.”

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

“We’ve been able to achieve 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 we have an offer worth paying for,” she said.

The focus on premium products is not only reserved for the largest coffee chain in the USA

Kraft Heinz enters the luxury market with the launch of the HEINZ 57 Collection in July. The “chef-inspired” spices are designed to “enchant the dining experience,” according to the company.

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

The introduction of other premium products comes in addition to redesigns of classic products, according to the company’s US President, Carlos Abrams-Rivera.

“One focus is how we tweak formulas to introduce cheaper ingredients,” Abrams-Rivera told CNBC’s Squawk Box on July 28. “And how do we tailor our products to different consumers so they can access different products at different price points.”

Mondelez is following a similar path. The company announced an agreement to acquire organic-focused Clif Bar & Company in June, while all of the company’s acquisitions in 2021 — Hu Master Holdings, Lion/Gemstone Topco and Gourmet Food Holdings — were included in its second-quarter earnings report were labeled “Premium”.

“Value is about to boom and premium too”

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

McDonald’s, for example, attributed some of its U.S. growth to its high-value products in its earnings report for the second quarter of 2022.

Other companies try to attract both sides of the market by focusing on higher and lower priced products.

Nestle CEO Mark Schneider told investors on the earnings call that the approach had been used before.

“What we are seeing with the current situation is similar to what has happened in previous economic slowdowns and downturns,” Schneider said. “We’re looking for premium products, but we’re also looking for affordable products. By covering both ends of that spectrum, we’re well on our way and meeting those needs.”

According to KPMG’s Martin, reaching out to the widest possible customer base is key to sustaining and increasing profits in the current economic climate.

“In this landscape, value is booming and so is premium. Supermarkets are recognizing this, including discounters, who are expanding their core value ranges but also strengthening their premium offering. Their goal is to reach all commercial less audiences,” Martin said.

Increase 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 premium ranges in our portfolio are actually doing really well… We’re seeing some downtrading — that’s pack size, where people are moving to more affordable formats,” he said on July 26.

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

The model, described in December as “a string of pearls” by executive vice president and group CEO Vasiliki Petrou, relies on “a certain level of scarcity” to drive appeal and sales.

So far it seems to have worked. Beauty & Personal Care grew 7.5% last quarter, driven by “strong growth” at Prestige Beauty and Health & Wellbeing, according to the company’s announcement of second-quarter 2022 results.

A focus on premium products can also be a more palatable way to combat the cost of inflation than reducing items or pack sizes, according to EY Global Consumer Leader Kristina Rogers.

“These actions are limited, and as input costs continue to rise, companies are looking at how to add value to their products,” Rogers told CNBC.

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

“Companies are focused on improving the features of their product to increase consumer willingness to pay. These traits include brand building, higher quality products, sustainability or health traits to help validate a higher premium to be charged,” she added. Premium products take precedence when companies struggle with the cost of living

Joshua Buckhalter

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