- [James] Consumer elasticities have largely held up
better than expected year-to-date.
- [Michele] We continue to expect more elasticity.
- [Narrator] Price elasticity is a hot topic
in earnings calls during periods of high inflation,
like the one we are in now.
When inflation is high, companies raise prices
and consumer spending usually slows.
As you can see here, consumer spending
has held up relatively well so far,
despite the highest inflation in decades.
But experts say we're finally reaching a turning point
where consumer spending is beginning to slow.
And that's where elasticity comes into play.
Here's how price elasticity works
and why so many companies are talking about it.
- How much does demand for something change
when the price changes?
When something's elastic,
it means if the price goes up, demand falls.
That's not a great thing for companies
because then they have to worry about that
any price increase will really affect demand.
- [Narrator] Here's the chief commercial officer
of Southwest Airlines talking about this idea
in the company's second quarter earnings call.
- [Andrew] Leisure travelers have a price elasticity effect
where you can't go much higher.
- Narrator] What companies want
is for their product to be in-elastic
meaning a price increase doesn't really impact demand.
Elastic products are usually non-necessities,
like perfume and staples.
In-elastic products are typically things we really need
and that don't have many alternatives
like groceries and toilet paper.
But there are some exceptions.
- What has proven in-elastic,
particularly around the pandemic
has been branded household goods.
In past kind of bumpy economic times,
people have switched or traded down
to cheaper products around the house.
A lot of people who really watch the industry
have been surprised by how much people are willing
to continue to spend on these household basics.
- [Narrator] Gym memberships are also in-elastic right now.
For example, Planet Fitness raised the price
of its black card membership in May
bringing the monthly fee for new members
up from 22.99 to 24.99.
And the company said in August...
- [Chris] We haven't seen an initial dip
in our black card percentage rate
as we did with the past price increases.
- Covid has eased up.
Everybody's kind of making up for lost time.
They're wanting to get out.
So they're spending on travel.
They're spending on experiences, on movies, on eating out,
and it's been a really big shift
from goods to the service side of the economy.
- [Narrator] Several factors affects products' elasticity.
- It's the necessity of the product.
So how important is it?
You know, what's the competition like?
Are there a lot of other options?
Some of it's just emotional, you know.
Some people really believe a brand is a lot better
than another brand.
- [Narrator] Elasticity also depends on the price range
of the product itself.
If it's a low cost item,
a slight increase in price matters to consumers.
If it's a more expensive item,
then a small increase isn't as noticeable.
These are examples
of what executives consider when they talk about elasticity.
- What executives say and think about elasticity
matters a lot to consumers
because ultimately their assessment
of what consumers are willing to pay
will drive their decisions on how much to charge.
Last year, when CEOS were talking about elasticity,
they were more saying, wow, like everything's in-elastic
because consumers are just willing to spend.
- [Narrator] Now, prices are still going up
because of inflation but demand is starting to go down.
So certain products are becoming more elastic.
Unilever, Proctor and Gamble, and Kraft Heinz
each reported lower volumes in their latest quarters
meaning people purchase fewer brand items
amid higher prices.
Many retailers have lowered profit expectations for the year
and are cutting costs as consumers are pulling back spending
in categories like apparel and home goods.
- [Jeff] During the quarter, Macy's brand customers
across all income tiers slowed and shifted their spend.
- [Narrator] In recent weeks, sales of premium detergents,
like Tide, have been on the decline
according to industry data.
- After all this time
of like sticking to this very high-end detergent,
consumers are shifting to cheaper detergent.
- [Narrator] P&G executives said they believe
Americans will keep spending on household products
even if inflation and the overall economy worsen.
(light music)
So how can companies like P and G maintain market share
when their products become more elastic?
One strategy is to promote the cost saving benefits
of their products.
- And it'll save you up to $150 a year.
- And it's cold.
- There's a version of laundry detergent
that you can use in cold water.
So the detergent isn't less expensive.
In fact, it's even more expensive
than it was six months ago.
But they say, Hey, you know, but the money you're gonna save
on not having to heat your water makes this detergent
like overall more cost-effective.
- [Narrator] Another strategy
is to offer smaller-sized products at lower prices
to appeal to cash-strapped consumers.
- So if you only have $10, you can still get
your name brand detergent.
And that's something that consumers who don't have
as much money do sometimes out of necessity.
It also means they're actually paying more
for each quantity of the product
because the less you buy, the more expensive it is.
- [Narrator] A P&G spokeswoman says the company
has always offered various package sizes
to meet different consumer needs.
And those sizes vary by retailer and market.
Kraft Heinz takes a similar approach
by offering one-dollar Lunchables
and lower-priced packages of Kraft Singles cheese
with fewer slices.
Companies also have the option to lean on retailers
to get more shelf space
or improve the presentation of their products in the aisle.
(light music)
While inflation slowed a bit in August,
underlying price pressures and wage growth
suggest it could run well above the Fed's 2% target
for some time, which is why industry leaders
are keeping a close eye on the labor market.
The idea is that as long as people stay employed,
consumer spending will likely remain solid.
But supply chain disruptions and consumer demand
have both shown signs of easing recently
which economists expect will slow price increases for goods.
So the dilemma for many companies now
is whether to raise prices or cut costs.
- When do we start laying off workers
so we don't have to raise prices?
Depending on the industry, some companies are there,
some companies aren't there.
So I think figuring out when that happens
is where a lot of companies are right now.
(light music)