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.

A sharp technology sell-off has exposed a new anxiety on global markets: whether the enormous borrowing behind the artificial-intelligence infrastructure boom can generate sufficient returns as interest rates rise and Chinese competition intensifies.

The artificial-intelligence investment boom has powered technology shares, semiconductor manufacturers and data-centre operators to extraordinary heights. Last week, investors were given a reminder that much of this expansion is being built with borrowed money.

The technology-heavy Nasdaq Composite fell 4.5 per cent over the week ended October 16, its weakest performance since late June. Semiconductor shares suffered an even deeper correction, with the Philadelphia Semiconductor Index losing about 11.4 per cent.

The selling spread quickly through global markets. Micron Technology fell 14.6 per cent over the week, while South Korea’s Samsung Electronics and SK Hynix dropped approximately 18 per cent and 24 per cent respectively.

This was more than a routine bout of profit-taking. Investors were reassessing three interconnected risks: higher interest rates, the rapidly expanding debt burden attached to AI infrastructure and the prospect of stronger competition from Chinese memory-chip manufacturers.

The debt behind the AI build-out

Artificial intelligence requires a physical infrastructure network of enormous scale. Data centres must be built, advanced processors purchased, power supplies secured and cooling systems installed before customers begin generating meaningful revenue from them.

Technology companies are increasingly supplementing their own cash with corporate bonds, syndicated loans, equipment leases, private credit and project-level financing.

JPMorgan describes the emerging funding model as a combination of conventional corporate borrowing and project finance tied to individual data-centre assets. In Australia, the Reserve Bank estimates that syndicated loans accounted for approximately three-quarters of data-centre financing during 2025 and 2026 to date.

The numbers are becoming large enough to affect broader credit markets. The Federal Reserve Bank of Dallas has cited Wall Street estimates suggesting AI-related investment-grade bond issuance could approach US$300 billion in 2026 alone.

That borrowing is not automatically problematic. Debt can be an efficient way to finance long-lived infrastructure when future revenue is sufficiently predictable. The concern is that AI technology, customer demand and computing economics are changing much faster than the repayment schedules attached to the assets.

A data centre financed today may carry debt for years. Investors must therefore make assumptions about future utilisation rates, electricity prices, chip performance, customer concentration and the amount businesses will ultimately pay for AI computing.

When interest rates rise, those assumptions become less forgiving.

Inflation changes the calculation

September’s US inflation data intensified the pressure. Consumer prices increased 3.7 per cent over the year, ahead of market expectations and up from 3.4 per cent in August.

The hotter reading reduced confidence that interest rates would fall quickly and pushed bond yields higher. That matters particularly for companies whose valuations depend on profits expected well into the future, as well as highly leveraged infrastructure operators that may need to refinance.

CoreWeave has emerged as a closely watched test case. The specialist cloud-computing company has accumulated substantial debt and lease obligations to build AI capacity, while relying on a concentrated group of large technology customers.

Its shares fell sharply during the sell-off, while the cost of insuring its debt against default climbed. CoreWeave has argued that its contracted backlog more than covers its obligations and that financial markets do not always understand its business model. Nevertheless, its securities have become a proxy for investor confidence in debt-funded AI infrastructure.

Oracle, another major investor in AI computing capacity, fell 8.8 per cent in Friday trading, while CoreWeave dropped 15.5 per cent.

The question is shifting from how much AI infrastructure can be built to how profitably it can be operated.

China adds another source of pressure

Interest rates were not the only catalyst. Reports of advances by Chinese memory-chip producer ChangXin Memory Technologies raised concerns that lower-cost Chinese products could increase competition across the global semiconductor industry.

Memory chips are essential to AI systems, but the industry is historically cyclical. Periods of tight supply and high pricing can encourage rapid investment, eventually producing oversupply and falling margins.

The prospect of a well-funded Chinese competitor expanding its technological capabilities unsettled investors in Samsung, SK Hynix and Micron. It also demonstrated that AI-related demand does not insulate chipmakers from conventional competitive pressures.

That combination—slower rate cuts, more expensive financing and potentially cheaper supply—challenged the assumption that every company exposed to AI would enjoy continually expanding margins.

A reset rather than the end of the boom

The sell-off does not establish that the AI boom is ending. Demand for computing power remains strong, the largest technology companies continue to generate formidable cash flows and many infrastructure projects are backed by long-term customer contracts.

What has changed is the market’s willingness to overlook the price and financing structure of that growth.

The most resilient companies are likely to be those able to fund investment from operating cash flow, secure long-duration customers and demonstrate that new capacity will earn returns comfortably above its financing costs.

More speculative operators may face greater scrutiny, particularly where debt is expensive, customers are concentrated or expected revenue depends on demand that has not yet materialised.

For Australian investors, the lesson extends beyond US technology shares. Local data-centre operators, infrastructure funds, electricity suppliers and property groups are increasingly exposed to the same investment cycle.

Artificial intelligence may remain one of the defining growth themes of the decade. But last week’s correction showed that enthusiasm for the technology does not eliminate financial discipline.

The next stage of the AI boom will be judged not only by computing power, model performance or demand for chips, but by something more traditional: whether the assets being financed can generate enough cash to repay the money borrowed to build them.

Fact box

Nasdaq Composite: Down 4.5 per cent for the week ended October 16, 2026

Philadelphia Semiconductor Index: Down approximately 11.4 per cent

Micron Technology: Down approximately 14.6 per cent

Samsung Electronics: Down approximately 18 per cent

SK Hynix: Down approximately 24 per cent

US September inflation: 3.7 per cent annually

Estimated 2026 AI-related investment-grade issuance: Approximately US$300 billion