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High prices are hitting a tipping point with consumers frustrated with the growing cost of products.
While inflation has recently cooled a bit, big brands like McDonald’s and Starbucks are blaming increased prices over the past few years for sluggish sales.
During its recent earnings call for the second quarter, McDonald’s reported its first drop in global sales since 2020, citing inflation-concerned consumers who either skipped eating at restaurants or chose cheaper options. The fast-food giant is working on developing better budget-conscious options like meal deals, CEO Chris Kempczinski told investors.
“Beginning last year, we warned of a more discriminating consumer, particularly among lower-income households,” Kempczinski said. “And as this year progressed, those pressures have deepened and broadened. The QSR sector has meaningfully slowed in the majority of our markets and industry traffic has declined in major markets like the U.S., Australia, Canada and Germany.”
Starbucks and Yum Brands — which owns Pizza Hut and KFC — have also attributed declines in sales to price-skeptical consumers.
Fast-food chains aren’t the only ones facing a pricing crisis. Execs from a wide range of companies including O’Reilly Automotive, consumer-packaged-good giant Tyson Foods and pharmacy chain Walgreens Boots Alliance are also sounding the alarm on inflation.
Melanie Boulden, executive vice president, group president of prepared foods and chief growth officer at Tyson Foods, said that retail prices have increased a total of 20% over the past three years. That is a problem because people are making fewer impulse purchases.
“The inflation impact, coupled with historically low savings rate has created a more cautious price-sensitive consumer,” Boulden said during Tyson Foods’ second-quarter earnings call. “And we’re also seeing a cautious consumer prioritized essential staples over discretionary categories.”
Some brands are spending on ads to explain price increases
In response to increasing prices, some brands like Walgreens Boots Alliance are investing in targeted promotions that offer deals to consumers. Those offers have “driven traffic and will generate improved customer loyalty, but they weigh on near-term profitability as we refine our approach,” Walgreens Boots Alliance CEO and director Timothy Wentworth said during the company’s third-quarter earnings.
CPG giant General Mills is investing in ads for brands like pet food brand Wilderness to promote the value of higher prices to consumers.
“The job to do then is to spend the money there wisely, and we start with brand communication,” Jeffrey Harmening, chairman and CEO of General Mills, said during the company’s recent fourth-quarter earnings call. “And so we have a meaningful increase.”
To prevent shoppers from turning to cheaper store brands, Kimberly-Clark said it planned to increase ad spend in 2024. The Texas-based manufacturer behind Kleenex tissues, Huggies diapers and Cottonelle toilet paper also hired marketing veteran Patricia Corsi as its new chief growth officer in May.