Why Cheap Toilet Paper Sets Off Alarm Bells Among Some Investors

Sellers of everyday consumer goods are experiencing a growing divide in their customer base between the more and less affluent. How they respond depends in part on where their products sit in the pecking order.

Both packaged-food companies and makers of household goods such as cleansers and paper towels are describing a bifurcation whereby higher-income consumers are spending freely, but those with lower incomes are feeling increasingly pinched by the cumulative impact of years of inflation.

“I think there’s certainly been much more bifurcation of the market, and it’s been creeping up over time. I wouldn’t say it’s been a sudden change,” Bank of America analyst Anna Lizzul said in an interview. Companies that are more exposed to low-income consumers “have mentioned the word bifurcation many times over the last 12 months,” she added.

Yet things appear to have come to a head recently. For food companies in particular, discounts and promotions are now back on the table after years of price increases—a significant concern for their investors. General Mills , during its latest quarterly earnings conference call, said it would step up coupon offerings in the current fiscal year and described the intensity of promotions in the industry as back to pre-Covid levels. The company’s stock fell 4.8% in response.

But for those targeting better-off households, the imperative is to keep investing and innovating to continuously improve their products, justifying still-higher prices in a process referred to as premiumisation.

This has long been the strategy of Procter & Gamble , which tends to occupy the premium tier of the categories in which it operates, from Gillette razors to Bounty paper towels. “The consumer within our categories, the consumer that represents our consumption base is actually holding up very well,” P&G Chief Financial Officer Andre Schulten said at an investor conference in June.

Most consumer-staples companies, however, have products targeting various income levels. General Mills, for instance, boasts organic Annie’s mac and cheese and high-end Blue Buffalo pet food among its brands. Kimberly-Clark competes with P&G at the high end in many categories, while also offering value-tier brands such as Scott toilet paper and paper towels.

The premium tier of products “continues to grow very, very robustly,” Kimberly-Clark Chief Executive Michael Hsu said on the company’s first-quarter conference call in April. “That all said, clearly, I would say, middle- to lower-income households look like they are becoming more stretched.”

“I think the growth driver for us over the long term is by making products better, premiumising, elevating our categories. But we want to serve the value-oriented consumer as well, too,” Hsu said.

Compared with P&G and Kimberly-Clark, Clorox stands out as more exposed to low-income consumers thanks to the categories it plays in, such as cleansers that face more competition from private-label goods, said Bank of America’s Lizzul. This is the case even though Clorox too often occupies the higher end of those categories, such as with its Glad-brand trash bags.

The company “is returning to pre-COVID levels of promotion to support a return to volume growth,” she wrote in a recent note. While much of that promotion spending will go to things such as displays as well as discounts, she still sees it having an impact on pricing and sales mix in the near term. Many other companies in the household-goods space are preferring for now to spend on stepped-up marketing and other investments in their brands instead of discounts, she said.

To be sure, lower-income American households are in aggregate still better off than they were before the pandemic, even accounting for inflation. Goldman Sachs forecasts that real, inflation-adjusted incomes for the bottom 20% will rise 1.8% this year. They also expect the top 20% to earn 2.7% more. At the same time, cash cushions built up during the pandemic have declined. The percentage of Americans who say they have enough cash to cover an unexpected $400 expense fell to 63% in 2023, equivalent to 2019 but down from 68% in 2021, according to Federal Reserve surveys.

Among those living paycheck to paycheck, there have been other shocks as well. Notably, the expiration of higher pandemic-related Supplemental Nutrition Assistance Program benefits in March 2023 hit the food budgets of certain households by hundreds of dollars a month. Speaking on an earnings conference call in April, Nestlé CFO Anna Manz said that benefit change plus years of cumulative inflation had together reduced the purchasing power of lower-income American households by about 50% as of the first quarter.

“Now those are the consumers that predominantly buy in the frozen-food category, which is why we see a continued ongoing impact there,” Manz said. The Swiss food company owns frozen brands such as DiGiorno, Stouffer’s and Lean Cuisine. In its first-quarter earnings report , it said real internal growth, its measure of underlying sales volume, fell 5.8% year-to-year in North America, “primarily driven by a decline in frozen food.”

Yet even here, the company expects product innovation to be part of the solution. “There’s a lot to come, particularly on frozen actually, which is a high-innovation category. Consumers like seeing new stuff coming through; they want new meals,” Manz said.

Over time, premiumisation is a fundamental growth driver for all consumer-staples companies. The unit volume growth of diapers, for instance, is essentially just a function of birth rates. Only by making them better over time and charging more for that improvement can companies really drive revenue growth.

When lower-income consumers are feeling pressured, however, that long-term imperative might conflict to a degree with near-term necessities. So while it is understandable that companies often say they prefer to invest in marketing and innovation, many will also capitulate on price.

Investors could punish them for that.

Former New Hampshire Gov. Chris Sununu delivered a warning to Treasury Secretary Scott Bessent during a recent visit to Washington: Already-high airfares will surge if the war in Iran doesn’t end soon.

Sununu, a Republican who represents some of the biggest airlines as president of the industry group Airlines for America, has for weeks sounded the alarm to Trump administration officials about the economic fallout from high jet fuel prices. The war, Sununu has argued, must come to a close soon, or things will get worse.

Administration officials have gotten the message.

Privately, President Trump’s advisers are increasingly worried that Republicans will pay a political price for the rising fuel costs, according to people familiar with the matter. Many of those advisers are eager to end the war, hoping prices will begin to moderate before November’s midterm elections.

The fallout from the U.S.-Israeli attack in late February has slowed traffic through the Strait of Hormuz, a vital shipping lane, triggering a sharp increase in oil, gasoline and jet-fuel prices.

That means consumers are grappling with high costs ahead of the summer travel season, as they consider vacation plans.

Sixty-three per cent of Americans said they put a great deal or a good amount of blame on Trump for the increase in gas prices, according to a new poll conducted by NPR, PBS and Marist.

More than 8 in 10 Americans said struggles at the gas pump are putting strain on their finances.

Jet-fuel prices roughly doubled in a matter of weeks after the war began, and they have remained high. Airlines have said that will add billions of dollars of additional expenses this year, squeezing profit margins.

U.S. airlines spent more than $5 billion on fuel in March—up 30% from a year earlier, according to government data.

Carriers have been raising ticket prices, hoping to pass the cost along to consumers, and they are culling flights that will no longer make money at higher price levels.

In March, the price of a U.S. domestic round-trip economy ticket rose 21% from a year earlier to $570, according to Airlines Reporting Corp., which tracks travel-agency sales.

So far, airlines have said the higher fares haven’t deterred bookings and they are hoping to recoup more of the fuel-cost increases as the year goes on.

Earlier this week, Trump said the current price of oil is “a very small price to pay for getting rid of a nuclear weapon from people that are really mentally deranged.”

Secretary of State Marco Rubio told reporters that if Iran got a nuclear weapon, the country would have more leverage to keep the strait closed and “make our gas prices like $9 a gallon or $8 a gallon.”

Trump has taken steps in recent days to bring the war to an end. Late Tuesday, the president paused a plan to help guide trapped commercial ships out of the Strait of Hormuz, expressing optimism that a deal could be reached with Iran to end the conflict.

Crude oil prices fell below $100 a barrel on Wednesday, after reports that Iran and the U.S. are working with mediators on a one-page framework to restart negotiations aimed at ending the conflict and opening the strait.

Sununu said Trump administration officials are conscious of the economic fallout from the war: “They get it…and I think that’s why they’re trying to get through the war as fast as they can.”

But he cautioned that it could take months for prices to return to prewar levels.

“Ticket prices won’t go down immediately” after the strait is fully reopened, Sununu said. “You’re looking at elevated ticket prices through the summer and fall because it takes a while for the prices to go down.”

Since the initial U.S.-Israeli attack in late February, Sununu has met in Washington with National Economic Council Director Kevin Hassett, representatives from the Transportation Department and senior White House officials.

A White House official confirmed that Hassett and Sununu have discussed the effect of increased fuel prices on the airline industry. The official said the conversation touched on how the industry can mitigate the impact of high jet fuel prices on consumers.

“The president and his entire energy team anticipated these short-term disruptions to the global energy markets from Operation Epic Fury and had a plan prepared to mitigate these disruptions,” White House spokeswoman Taylor Rogers said, pointing to the administration’s decision to waive a century-old shipping law in a bid to lower the cost of moving oil.

Rogers said the administration is working with industry representatives to “address their concerns, explore potential actions, and inform the president’s policy decisions.”

A Treasury Department spokesman pointed to Bessent’s recent comments on Fox News that the U.S. economy remains strong despite price increases. The spokesman said Treasury officials have met with airline executives, who have reaffirmed strong ticket bookings.

“We’re cognizant that this short-term move up in prices is affecting the American people, but I am also confident, on the other side of this, prices will come down very quickly,” Bessent told Fox News on Monday.

The war has already contributed to one casualty in the industry: Spirit Airlines. Company representatives have said they were forced to close the airline because the sustained surge in jet-fuel prices derailed the company’s plan to emerge from chapter 11 bankruptcy.

The Trump administration and Spirit failed to come to an agreement for the company to receive a financial lifeline of as much as $500 million from the federal government.

Transportation Secretary Sean Duffy has argued that the Iran war wasn’t the cause of Spirit’s demise, pointing to the company’s past financial struggles, as well as the Biden administration’s decision to challenge a merger with JetBlue.

Other budget airlines have also turned to the federal government for help since the U.S.-Israeli attack. A group of budget airlines last month sought $2.5 billion in financial assistance to offset higher fuel costs, and they separately wrote to lawmakers asking for relief from certain ticket taxes.

Why Cheap Toilet Paper Sets Off Alarm Bells Among Some Investors

Companies selling everyday goods say lower-income consumers are struggling, but better-off households are spending freely

Administration officials have spoken to the airline industry, which has voiced concerns about the rising costs.