Premium Spenders Are Rescuing Companies From the Mass-Market Squeeze

(Bloomberg) -- From yogurt to beer to the humble diaper, consumer companies are reaping the benefits of pushing premium products that command higher margins and give consumers a greater sense of reward.

The strategy was on display this past week, among the busiest in the quarterly earnings calendar, with bellwethers from Nestle SA to Anheuser-Busch InBev NV to Starbucks Corp. releasing their numbers. The overarching theme: sales of higher-end products are outpacing their more utilitarian siblings, and companies are adjusting their portfolios accordingly to join in the rush toward what the industry calls premiumization.

“The premiumization trend is very strong and the fastest growth is happening at the higher price points,” said Ivan Menezes, the chief executive officer of drinks giant Diageo Plc, which disposed of more than a dozen of its lower-priced labels like Seagram’s VO whiskey and Myers rum last year to focus on higher-end categories. “Our strategy is all about building our brands and portfolio around this trend of people drinking better, which is very broad based and sustained across geographies.”

L’Oreal SA’s proposition that consumers should reach for the top shelf because they’re worth it has long set the tone of self-fulfillment through shopping. But only recently have companies across all industries embraced that mantra, realizing that younger, savvier clients demand more from a product than its immediate utilitarian purpose. Instead, environmentally sound items with a design edge and a product story that resonates with the buyer are moving into focus, and staid lines with little buzz are headed for disposal.

Discounting Competition

Part of the move is born out of pure necessity. Aside from consumer preference for more specialized products, the shift to e-commerce and the rise of discounters has made prices more transparent, making it harder to raise them. Supermarkets, particularly in battleground markets like the U.K. where Brexit is adding extra duress, have also become more aggressive in negotiating with manufacturers and competition has intensified.

That pressure is largely absent at the higher end, especially in growth markets like China where consumption comes with an aspirational twist. Diageo’s most premium brands jumped almost 20% over the last year in Asia as Chinese consumers snapped up more deluxe spirits. Anheuser-Busch joined its peers to say premium is a critical component of its strategy amid surging growth at its high-end lines, which includes Stella Artois and Hoegaarden beers.

Starbucks has also received a boost from higher prices, including in its two key markets: the U.S. and China. In the most recent quarter, same-stores sales jumped 7% in the U.S. coffee chain’s home market, fueled by an increase in the average amount customers paid.

Companies are focusing on higher-end products at a time when economies in Europe are showing signs of sputtering, hoping that the lines’ more stable pricing power will insulate them from a probable downturn. In Germany -- Europe’s biggest economy -- the business outlook for companies tumbled to the lowest level in a decade as the Bundesbank said Europe’s largest economy shrank in the second quarter, adding to signs that the country may be inching toward a recession.

‘Very Crowded’

“When you look at the mass market, whatever category it is, it’s very crowded and it’s highly promotional and deflationary,” said Robert Waldschmidt, an analyst at Liberum. “It’s going to be difficult in a mass-market big-bucket category to get pricing that’s anything short of inflation matching.”

And there’s no product too basic to escape the glare of premiumization. Kimberly-Clark Corp. has come up with Huggies Special Delivery, sold in a striking black box and aimed at millennial moms, in what it calls a "super-premium diaper" that’s softer, made with plant-based materials, and free of parabens and other harsh chemicals.

"The only way to make premiumization work is if you make products worth more and worth paying that premium for, and that’s what we’re trying to do," CEO Michael Hsu said on the company’s earnings call.

The move upmarket means that some products in companies’ portfolios no longer make the cut. While there’s always a market for cheap, simple and basic products, being stuck between budget and premium is a place that consumer companies want to avoid, according Alan Jope, the CEO of Unilever. The company has sold its struggling spreads unit and added fast-growing businesses such as Pukka Herbs tea to its roster of brands to accelerate growth. Other moves include buying Sir Kensington’s, a brand of upmarket ketchup and other dressings, as well as premium ice-creams such the Grom and Talenti lines of gelato.

Chinese Demand

“In almost every country in the world, we see a bifurcation,” Jope said. “We see a growth at the value-end, and we see growth at the top end.”

China, in particular, is a consumer market that’s responding well to the upmarket shift. While food giant Nestle SA noted a slowdown in the broader Chinese food and beverage market in China, premium products like infant nutrition performed well, the Swiss company said. Such lines now make up more than a fifth of total sales, a number that will continue to go rise, the company predicted.

“The consumer population out there has very high expectations when it comes to quality, sustainability and taste,” said Nestle CEO Mark Schneider. “And at the same time, they’re also willing to pay for it. That side we feel very good about.”

--With assistance from Craig Giammona and Tiffany Kary.

To contact the reporters on this story: Corinne Gretler in Zurich at cgretler1@bloomberg.net;Thomas Buckley in London at tbuckley25@bloomberg.net;Ellen Milligan in London at emilligan11@bloomberg.net

To contact the editors responsible for this story: Eric Pfanner at epfanner1@bloomberg.net, Benedikt Kammel

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