Food companies feel the pain as consumers reject higher prices

Grocery inflation is slowing, and the companies that make the food are starting to sweat.

As part of their quarterly earnings reports Thursday, snack powerhouses PepsiCo and Conagra Brands reported lower revenue and unit sales, pointing to cost-conscious consumers pushing back on high prices. And government data reflects the trend: the Bureau of Labor Statistics reported that food prices rose only slightly last month.

“We’re seeing consumers be very price sensitive,” said Bobby Gibbs, a partner in the retail and consumer goods division of the marketing consulting firm Oliver Wyman. “Consumers are cherry-picking promotional prices more and retailers are putting out more promotional pricing than they have in the last few years.”

And while the economy is technically strong in some areas, prices for many goods remain much higher than before the pandemic, while household debt has risen. Grocery prices are up 18 percent since 2020, but the latest inflation report released Thursday shows them almost leveling off.

Overall costs for “food at home” rose only 0.1 percent in June over the previous month. Prices for some key budget items are already falling: fruits and vegetables are down 0.5 percent, while cereals and bakery products are down 0.1 percent.

PepsiCo’s and Conagra’s results suggest that consumers frustrated by rising prices are now spending less on established brands, particularly in the snack and soda aisles.

PepsiCo, which makes not only its namesake sodas but also other well-known drinks, Frito-Lay snacks and Quaker cereals, raised prices by 5 percent in the second quarter and saw unit sales shrink. Volumes in North America fell 4 percent for Frito-Lay, one of the company’s more prolific snack businesses, and 3.5 percent for PepsiCo Beverages.

Some retailers have already responded. Target, Aldi, Amazon and Walmart announced in May that they were reducing prices on many grocery items.

PepsiCo chief executive Ramon Laguarta acknowledged in a call with analysts Thursday that customers are hungry for better deals.

“For particular consumers, we need some new entry price points and probably some new promotional kind of mechanics that don’t expect for the consumer to invest so much cash in a purchase of salty” snacks, he said. “So there’s adjustments that we have to make. … There is some value to be given back to consumers after three or four years of a lot of inflation.”

PepsiCo said it will try “a vast array of combinations” of products, such as variety packs of snacks, and a wider range of prices. It also plans to lean into offerings branded as healthier, which continue to sell well, such as PopCorners, Smartfood and Bare, and build out its foreign snack lines, including Mexican brands Sabritas and Gamesa.

Also Thursday, Conagra reported a 2.3 percent sales decline and a 1.8 percent decrease in volume during its mostly completed quarter. The soft sales numbers were driven by “continued lower consumption trends,” according to the company, whose brands include Slim Jim, Banquet, Vlasic, Swiss Miss and Duncan Hines.

Food companies have been seeing “value-seeking behavior” over the past year, among lower-income and higher-income customers alike, Conagra chief executive Sean Connolly told analysts Thursday.

“Part of that is grounded in reality―people needed to make their household budgets work for them―and part of it was principle,” Connolly said. “Even higher-income customers on principle didn’t like the prices they were seeing in the basket and they would trim on purchases.”

Those pressures are expected to wane throughout the year as consumers grow accustomed to the higher price points, Connolly said. The company’s sales of snacks and frozen foods are now essentially flat, for example. A year ago those categories were in a steep decline.

Lower-income consumers, in particular, have struggled with years of inflation, said Connor Rattigan, an analyst covering food at Consumer Edge. “There’s definitely still some sticker shock going on, since prices have increased so quickly so fast,” he said.

Over the past six months, food companies such as Conagra have tried to use temporary discounts to sell more products, Bank of America analyst Peter Galbo said.

“But a lot of the promotional activity that they’ve put in place hasn’t really worked,” Galbo said. “So now it becomes a question of whether they need more permanent reductions on price.”

One of the growing threats for packaged goods companies like PepsiCo and Conagra are retailers’ private-label brands. Interest in store-brand grocery items increased during the pandemic, and customers have stuck with them as the quality improved.

Walmart, which already has a handful of brands, unveiled in April a new private label lineup of “chef-inspired food” mostly in the $5-and-under range. Walgreens last month said it plans to expand its line and has already removed eight national brands from its health and wellness categories. Aldi and Lidl, Germany-based value grocery chains that expanded rapidly during the pandemic, specialize in private-label products, though they also carry popular national brands.