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Personalized coffees and prestige skincare: Consumers snap up premium products despite cost-of-living crisis

“Once we create more premium beverages, it becomes more challenging for customers to reproduce it in the home and we believe helps with the idea of trade down,” Starbucks CFO Rachel Ruggeri told CNBC’s “Squawk Box” on Aug. 3.

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Personalized coffees, “prestige” skincare and “elevated” sauces and spreads are simply a few examples of how companies like Starbucks, Unilever and Kraft Heinz are tilting their focus toward premium products and consumers look like loving it.

But why are companies zooming in on the pricier offerings when individuals are feeling the consequences of the biggest inflation shock in decades?

“Customer insight is key for consumer businesses because the cost of living squeeze tightens,” Paul Martin, KPMG’s U.K. Head of Retail, told CNBC.

“Whilst it’s true that some individuals are needing to increasingly turn to value products watching every penny, additionally it is the case that other individuals are nervous concerning the economic outlook but nonetheless have money to invest and are essentially trading right down to premium products,” Martin said.

“For instance, swapping meals out for premium meals in. Whilst this group may also look to cut costs via the worthiness essentials, they don’t be filling the basket solely using them,” he said.

‘An offering that’s worth paying for’

Starbucks reported record customer counts and sales within the last quarter, beating Wall Street expectations. The outcomes may actually reaffirm the view that some customers aren’t trading down or reducing their spending regardless of the increasing cost of living.

Designing bespoke products is paramount to upping customer engagement even though money is tight, Starbucks CFO Rachel Ruggeri told CNBC’s “Squawk Box” on Aug. 3.

“Once we create more premium beverages, that’s more challenging for customers to reproduce in the home and we believe helps with the idea of trade down,” Ruggeri said. “It could mean that perhaps a customer doesn’t come as much, but you want to ensure that we’ve reasons for the clients to come in to the stores and connect to us.”

Giving customers more flexibility also helped to market more costly products and spread higher costs, Ruggeri said.

“We have been able to do this through our personalization, that is a choice, and what we’ve seen up to now is our demand is strong. And that tells us that people have an offering that’s worth spending money on,” she said.

The concentrate on premium products isn’t unique to the biggest coffee chain in the U.S.

Kraft Heinz gets in on the blissful luxury market with the launch of its HEINZ 57 Collection in July. The “chef-inspired” condiments are “made to add magic to the culinary experience,” based on the company.

This came because the company lifted prices by a lot more than 12% in reaction to higher transportation, labor and ingredients costs amid rising inflation.

The introduction of more premium products is along with redesigns of classic products, based on the company’s U.S. president Carlos Abrams-Rivera.

“One focus is just how do we optimize formulas to create in things that are cheaper,” Abrams-Rivera told CNBC’s “Squawk Box” on July 28. “And just how do we customize our products to the various consumers to allow them to access different products at different price points.”

Treading an identical path is Mondelez. The business announced in June a deal to obtain organic-focused Clif Bar & Company, while all of the company’s 2021 acquisitions Hu Master Holdings, Lion/Gemstone Topco and Gourmet Food Holdings were referred to as “premium” in its second-quarter earnings report.

‘Value faces a boom therefore does premium’

Unsurprisingly, individuals are also reliant on cheaper products, which companies may also be sensitive to.

McDonald’s, for instance, attributed a few of its growth in the U.S. to its value products in its Q2 2022 earnings report.

Others want to attract both ends of the marketplace by concentrating on higher and lower-priced products.

Nestle CEO Mark Schneider told investors in the business’s half-year results earnings call that the approach has been used before.

“What we’re seeing with the existing situation is comparable to what happened in previous economic slowdowns and downturns,” Schneider said. “We focus on premium products but we also focus on affordable products. By covering both ends of the spectrum we’re successful and we’re serving those needs.”

Attractive to the widest possible customer base is paramount to maintaining and growing profits in today’s economic climate, in accordance with KPMG’s Martin.

“In this landscape, value faces a boom therefore does premium. Supermarkets recognize it, like the discounters, that are expanding their core value ranges, but additionally beefing up their premium proposition. Their aim would be to capture and retain all the trade-down audiences,” Martin said.

Driving desirability and sales

Unilever CEO Alan Jope told CNBC’s “Squawk Box” that the business was seeing an assortment of customers trading up and trading down.

“The premium ranges inside our portfolio are in fact doing perfectly We have been seeing some downtrading that’s on pack size, where folks are moving to less expensive formats,” he said on July 26.

In 2014, Unilever launched Prestige, an extravagance arm of the conglomerate that now includes Dermalogica, Tatcha and Paula’s Choice.

Referred to as “a string of pearls” by Executive VP and Group CEO Vasiliki Petrou in December, the model depends on “a particular degree of scarcity” to operate a vehicle desirability and sales.

Up to now, it appears to possess worked. Beauty & Personal Care grew 7.5% within the last quarter, driven by “strong growth” in Prestige Beauty and Health & Wellbeing, based on the company’s Q2 2022 results announcement.

A concentrate on premium products may also be a far more palatable method of tackling inflation costs in comparison to reducing items or packaging sizes, in accordance with EY global consumer leader Kristina Rogers.

“There exists a limit to these actions and due to the fact input costs continue steadily to rise, companies are considering how exactly to expand the worthiness of these products,” Rogers told CNBC.

“The only method to cultivate is therefore to go the premium and added value route. Companies have to demonstrate the added value of these brands and present consumers reasonable to get higher-priced products,” Rogers said.

“Companies are concentrating on increasing the top features of their product to increase consumers’ willingness to cover. These features include brand building, top quality products, sustainability, or health features, to greatly help validate an increased premium to be charged,” she added.

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