Personalized coffees, “prestige” skincare, and “elevated” sauces and spreads are just a few ways firms like Starbucks, Unilever, and Kraft Heinz are shifting their focus toward premium products – and consumers appear to be loving it.

But why are firms focusing on their more expensive items while consumers are dealing with the most severe inflation shock in decades?

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

“Whilst it’s true that some consumers are having to increasingly turn to value products and watch every penny, it is also the case that other consumers are nervous about the economic outlook but still have money to spend and are in essence trading down to premium products,” Martin said.

“For example, swapping meals out for premium meals in. Whilst this group will also look to save money via the value essentials, they won’t be filling the basket solely with them,” he said.

Starbucks announced record customer counts and sales in the most recent quarter, outperforming Wall Street forecasts. The findings tend to support the notion that, despite rising living costs, some customers are not trading down or cutting back on their expenditure.

Starbucks CFO Rachel Ruggeri told CNBC that designing customised solutions is critical to increasing customer engagement even when money is short.

“As we create more premium beverages, that’s more difficult for customers to replicate at home and we think that helps with the concept of trade down,” Ruggeri said. “It may mean that maybe a customer doesn’t come as frequently, but we want to ensure that we have reasons for the customers to come into the stores and interact with us.”

Giving clients more options also helped Ruggeri sell more expensive products and pass on greater costs.

“We’ve been able to do that through our personalization, which is a choice, and what we’ve seen so far is our demand is strong. And that tells us that we have an offering that’s worth paying for,” she said.

The emphasis on quality items is not unique to the largest coffee chain in the United States.

Kraft Heinz is entering the premium market with the July release of its HEINZ 57 Collection. According to the firm, the “chef-inspired” condiments are “intended to bring magic to the cooking experience.”

This happened as the corporation raised prices by more than 12% in response to rising transportation, labour, and ingredient costs.

According to the company’s U.S. president Carlos Abrams-Rivera, the introduction of new luxury products will be in addition to redesigns of classic products.

“One focus is how do we optimize formulas to bring in ingredients that are cheaper,” Abrams-Rivera told CNBC’s “Squawk Box” on July 28. “And how do we customize our products to the different consumers so they can access different products at different price points.”

Mondelez is on a similar path. In June, the business announced a deal to acquire organic-focused Clif Bar & Company, while all of its 2021 acquisitions — Hu Master Holdings, Lion/Gemstone Topco, and Gourmet Food Holdings — were classified as “premium” in the company’s second-quarter financial report.

Unsurprisingly, consumers rely on lower-cost products, which corporations are aware of.

In its Q2 2022 earnings report, McDonald’s, for example, attributed some of its success in the United States to its value offerings.

Other businesses are attempting to appeal to both sides of the market by emphasising premium and lower-priced products.

Nestle CEO Mark Schneider informed investors during the company’s half-year earnings call that the method had previously been used.

“What we’re seeing with the current situation is similar to what happened in previous economic slowdowns and downturns,” Schneider said. “We pay attention to premium products but we also pay attention to affordable products. By covering both ends of this spectrum we’re doing well and we’re serving those needs.”

According to KPMG’s Martin, appealing to the broadest potential client base is critical to maintaining and generating earnings in the current economic context.

“In this landscape, value faces a boom and so does premium. Supermarkets recognize it, including the discounters, who are expanding their core value ranges, but also beefing up their premium proposition. Their aim is to capture and retain all of the trade-down audiences,” Martin said.

Unilever CEO Alan Jope told CNBC that the company’s consumers were trading up and trading down.

“The premium ranges in our portfolio are actually doing very well … We are seeing some downtrading – that’s on pack size, where people are moving to more affordable formats,” he said on July 26.

Unilever introduced Prestige in 2014, a luxury division that now includes Dermalogica, Tatcha, and Paula’s Choice.

In December, Executive VP and Group CEO Vasiliki Petrou described the concept as “a string of pearls,” relying on “a certain level of exclusivity” to drive desirability and sales.

So far, it appears to be effective. According to the company’s Q2 2022 results announcement, Beauty & Personal Care rose 7.5% in the latest quarter, driven by “excellent growth” in Prestige Beauty and Health & Wellbeing.

According to EY global consumer head Kristina Rogers, focusing on premium products can be a more appealing way of combating inflation expenses than lowering items or packaging sizes.

“There is a limit to these actions and considering that input costs continue to rise, companies are looking at how to expand the value of their products,” Rogers told CNBC.

“The only way to grow is therefore to go the premium and added value route. Companies need to demonstrate the added value of their brands and give consumers a good reason to buy higher-priced products,” Rogers said.

“Companies are focusing on increasing the features of their product to extend consumers’ willingness to pay. These features include brand building, higher quality products, sustainability, or health features, to help validate a higher premium to be charged,” she added.

(Adapted from CNBC.com)

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