High Prices Have Buoyed Revenue Growth
In 2022, the amount of money that US consumers spent (what the Bureau of Economic Analysis calls personal consumption expenditure, or PCE) increased by 9% over 2021. Not all of that is considered “real” spending — that is, people buying more stuff. Of the 9% increase in spending, 6% came about because things cost more. Inflation accounted for 6% of the 9% “nominal” increase in PCE; the remainder was “real” growth. (For more on inflation, see my colleague Jitender Miglani’s blog.)
Despite their anxiety about a recession and threats of belt-tightening, consumers displayed remarkable resilience in absorbing price increases. As consumers spent more, companies chalked up more revenue. Because of persistent inflation and a price-resilient customer base (and something that economists among you will recognize as inelasticity of demand), most of the growth for companies in 2022 came from price increases. And this helped companies grow. For example, Coca-Cola, in its Q1 2023 earnings call, reported that a 12% increase in pricing, despite shrinking unit volume by 1%, had boosted revenue by 7%.
But Price Pressure Will Force Brands To Look Elsewhere For Growth
There’s a ceiling to how much growth you can squeeze out of pricing, and there are indicators that the tide is turning. Inflation, while well above historical averages, has been slowing down. Companies such as The Home Depot and Kraft Heinz, once pleasantly surprised by the price insensitivity of customers, are now seeing clear signs of them balking at continued price hikes. And while some brands are still signaling continued price increases through 2023, others indicate that the 2022-styled price-driven growth regime is at an end.
“Consumers are looking for convenient, filling, and nutritious meals while at the same time paying more attention to the price tag.” — Miguel Patricio, CEO of Kraft Heinz
As price hikes become more untenable in 2023, how will businesses slake their unquenchable thirst for growth? This is the central question that business leaders and marketers will grapple with for the rest of 2023. At some level, the answer is mathematically simple — if revenue growth does not come from pricing actions, it must come from volume increases. But there are multiple pathways to volume growth. What’s the best growth vector for a company in this market environment, given its competitive position and core competencies?
Brands Will Explore New Customer Segments To Boost Revenue
One lucrative source of growth is new customers. There are various ways to add to the customer pool, and a strategy that many mass-market consumer brands such as Chipotle and Walmart are pursuing is to explore a previously untapped segment: more affluent consumers. For example, sensing that growth is slowing among its core customer base, Walmart is looking to move more upmarket. Through its partnership with American Express Platinum (whose customers you would not usually think of as Walmart shoppers), which covers the monthly cost of Walmart+, the company is targeting a whole new segment. Any new customer it wangles will likely be high-spending and less price-sensitive. Of course, to retain this new and different customer, Walmart will have to make sure that it can uplevel its brand experience to match the expectations of this segment. But that’s another story about aligning brand promise with customer experience.
Stay Tuned For More
A lot of my research this year will focus on growth strategy. My earlier report — Manage Growth In An Economic Downturn — provided CMOs with a way to react quickly to the market and find tactics to protect and bolster revenue. In a future report, I will explore fundamental growth frameworks and strategies to help marketers and business leaders think through every aspect of growing revenue. Look out for ongoing blog posts and research on this topic as we help business leaders navigate a tricky growth environment. And if you’re considering attending CX North America in Nashville this year, pencil in my session on Tuesday, June 13, where I will discuss my growth strategy research.
Please request a guidance session if you have questions about this research or want to discuss your growth strategy.