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April 20, 2021, 8:36 AM CDT / Source: CNBC.com

By Amelia Lucas, CNBCProcter & Gamble announced on Tuesday that it will hike prices on baby care, feminine care and adult incontinence products in September to respond to higher commodity costs.

The consumer giant joins a host of other companies, including Kimberly-Clark and Coca-Cola, that are raising prices to protect profit margins. The companies are betting consumers will be willing to pay more for the brand version instead of opting for a cheaper private label. However, that outcome depends on the economic recovery from the coronavirus pandemic and how many consumers will have the cash to spare.

P&G said its price increases will vary by brand but will be in the range of mid-to-high single digits.
The announcement comes as a new report from the Consumer Brands Association revealed that sales of consumer packaged goods climbed 9.4 percent to $1.53 trillion last year.

The boom in demand hasn’t abated yet, the trade group said, noting that manufacturers are still struggling to catch up on inventory. To meet the challenge, companies are hiring more workers, adding new factory lines and boosting wages amid the protracted surge in demand.

“This was the greatest test that the system could have ever experienced,” said Geoff Freeman, chief executive of Consumer Brands. “Our wildest imagination may not have been able to imagine the 12-month surge that we just went through.”

Even as the pandemic subsides, Consumer Brands is forecasting that industry’s 2021 sales will still be up 7.4 percent to 8.5 percent from 2019. January sales are up 16 percent from the same time a year ago, representing the highest year-over-year change since last March. February sales growth slowed slightly but was still in the double digits. Before the pandemic, strong growth for a CPG company meant an increase in the low single digits.
“This industry is still sprinting a marathon,” said Katie Denis, Consumer Brands’ vice president of research and industry narrative.

The last year’s soaring demand means that manufacturers are still trying to catch up on supply, and every obstacle can mean millions of dollars in lost sales. Freeman cited a conversation with a chief executive who saw more than one-quarter of his manufacturing plants closed for a week in February due to the Texas winter storm. The Suez Canal blockage in March caused even more headaches.

General Mills and Clorox are among the companies that turned to third-party manufacturers for a temporary fix to skyrocketing demand. The situation has prompted some CPG companies to rethink inventory targets and how close products should be to retailers. Freeman said that some manufacturers won’t be able to catch up on inventory until new capital expenditures come online.

The current stress on the supply chain means that some shortages, like the ongoing ketchup packet scarcity first reported by the Wall Street Journal, are harder to forecast.

“That’s the kind of thing that we should see coming six to 12 months in advance,” Freeman said.

The surge in demand has resulted in higher wages for CPG manufacturing workers. PepsiCo and Hormel were among those who gave out bonuses to their frontline employees last year. According to the Consumer Brands report, pay for food manufacturing workers climbed 3.4 percent in July through September compared with the same time a year ago. Nationwide non-farm wages fell 0.8 percent in the same period.

“I don’t know if [wages] will climb higher than 2020, but there’s no reason to believe that there will be a drop off, according to the companies that we surveyed with McKinsey,” said Denis.

CPG companies also ramped up their hiring. After initial job losses hit the industry, particularly for food service suppliers, other food, beverage and household product manufacturers scrambled to scoop up more workers. Some companies hired 10 percent to 20 percent more workers than they actually needed to account for employees who were quarantining or caring for sick relatives, according to Freeman.