McBride (LON: MCB) shares are up 22% as the inflationary pressures boost their own brand manufacturing. That MCB shares are up is nice, of course it is, But there are two larger lessons we should also take from this. One is that the current inflationary pressures are changing consumer behaviour. That might mean we want to look at other own brand manufactures, also consider the implication of high end brands. The other is that this explains something about how CPI is calculated.
The news from McBride: “However, the continued effect of increases in the cost of living on consumers has meant that demand levels continue to be driven by a shift towards private label products across all markets and as a result, the favourable trading environment and momentum of the second half of FY23 has continued into the first quarter of FY24. The Group has continued its focus as a value adding partner with our customers as they increasingly grow their own label proposition. First quarter volumes were 8.0% higher overall compared to the first quarter of FY23, with private label growth of 10.8%.”
So, yes, all manufacturers have been hit by increased prices for everything - labour, ingredients, packaging and so on. This is what inflation is. However, we’re also seeing that consumer behaviour changing, trading down from high brands into own brands at the retail level. That then leads to more contracting with McBride from the retail chains.
McBride share price from Google Finance
This means that we might want to go looking for more contract manufacturers. McBride really does cleaning and household products. But who also does those? And who does the own brand foods and so on? For if we’re seeing this consumer behaviour here then we would also expect to see it across the market.
The other issue is to do with CPI itself. There’s a complaint out there that CPI undermeasures inflation. Because it includes substitution effects. That is, if prices change then people change their behaviour - so, if CPI calculations include the behaviour change then the SPI isn’t properly measuring the change in prices of doing the same thing as before. Well, yes, this is true. But if people do change their behaviour, and we also want to measure the price of the average lifestyle, then we’ve got to include substitution effects. For, as with these McBride results, we obviously do have substitution going on as prices change.
