PepsiCo reports in its earnings that people are buying fewer salty snacks from its Frito-Lay brands. It’s not the only food company that is seeking to lure back consumers stung by high prices.
Is $6 too much for a bag of Ruffles?
After nearly three years of price increases, signs that buyers have had enough are starting to mount. On Thursday, the food and beverage giant PepsiCo reported a 0.5 percent decline in revenues in the second quarter in its Frito-Lay snack business from year-ago levels, a result of a 4 percent drop in volumes in the category.
On an earnings call, PepsiCo executives were peppered with questions from analysts about whether the price of some of its popular snacks like Tostitos tortilla chips and Ruffles potato chips had simply become too high. The executives acknowledged that some consumers have become increasingly price conscious, with households across income levels seeking more value.
“There is clearly a consumer that is more challenged, and a consumer that is telling us that in particular parts of our portfolio, they want more value to stay with our brands,” Ramon Laguarta, PepsiCo’s chief executive, said.
To get more people to grab bags off the shelves, PepsiCo said it intended to cut prices or offer more sales on certain salty snacks and other products. “There is some value to be given back to consumers after three or four years of a lot of inflation,” Mr. Laguarta said.
In trading on Thursday, PepsiCo’s stock was flat, at about $163.
PepsiCo is hardly the only food and beverage company struggling with consumers who have shifted their purchasing habits in recent months. As commodity and labor prices soared in recent years, food and beverage companies, as well as restaurants, responded by steadily increasing prices. Now, however, some consumers are tapped out, either buying less or passing up brand names in favor of cheaper grocery store brands.
Inflation, particularly food inflation, is likely to be a hot topic in this year’s presidential election. On Thursday, the government reported that the overall Consumer Price Index had moderated to 3 percent in June on an annual basis, down from 3.3 percent in May and sharply reduced from the 9.1 percent peak in 2022. But the cost of food at grocery stores and restaurants is substantially higher than four years ago, even though prices have moderated in recent months.
High food prices are not just the consequence of rising commodity and labor expenses, but also of food manufacturers, retailers and restaurant chains trying to satisfy investors, including state pension funds and others. Higher prices boost profit margins and pay for billions of dollars in dividends and stock repurchases.
Now, however, as volumes for food companies and foot traffic for some restaurants are starting to decline, manufacturers and food chains are beginning to look at cutting prices or offering value deals to attract consumers back.
In late June, McDonald’s began offering a $5 value meal for a limited, one-month window. Whole Foods said it has reduced prices on a quarter of the goods in its stores. And Target said it planned to cut prices this summer on what it deems 5,000 “everyday products,” including milk, bread and diapers.
Overall, PepsiCo said that revenues grew about 1 percent in the quarter ending June 15, to $22.5 billion and that net income rose 10.4 percent to nearly $3.1 billion from a year ago. But a deeper dive into some of the numbers revealed softness in many of the company’s North American businesses.
Its breakfast and snack bar segment, Quaker Foods North America, reported a steep 18 percent drop in revenues and 34 percent decline in operating profit due largely to a food recall that began late last year involving possible salmonella contamination of food products manufactured at a plant in Danville, Ill. In April, PepsiCo moved to permanently close the plant.
But analysts on a call with PepsiCo executives on Thursday morning were more focused on its snack business.
Nailing down a pricing strategy that reflects what consumers are willing to spend on, and what they aren’t, will help reverse the decline in many of the company’s sectors, Mr. Laguarta told analysts.
“You see different behaviors happening everywhere. The connecting line would be: the consumer is more cautious,” Mr. Laguarta said. “But the consumer is willing to spend in areas where they see value.”
Source: The New York Times
