“We’re seeing consumers being very price sensitive,” said Bobby Gibbs, a partner in the retail and consumer goods practice of marketing consultancy Oliver Wyman. “Consumers are increasingly picking up on promotional pricing, and retailers are using more promotional pricing than they have in recent years.”
And while the economy is technically strong, prices for many goods remain higher than before the pandemic, and household debt has risen. Grocery prices have risen 18 percent since 2020, but the latest inflation report released Thursday shows they are stabilizing.
Total ‘food at home’ costs rose by just 0.1 percent in June compared to the previous month. Prices for some key budget items are already falling: fruits and vegetables fell by 0.5 percent, while cereals and bakery products fell by 0.1 percent.
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The results from PepsiCo and Conagra show that consumers frustrated by rising prices are now spending less on familiar brands, particularly in the snack and soft drink sections.
PepsiCo, which makes not only its namesake sodas but also other beverages, Frito-Lay snacks and Quaker cereals, raised prices 5 percent in the second quarter and saw unit sales decline. North American volumes fell 4 percent for Frito-Lay, one of the company’s most productive snack businesses, and 3.5 percent for PepsiCo Beverages.
Some retailers have already responded. Target, Aldi, Amazon and Walmart announced in May that they would slash prices on many groceries.
PepsiCo CEO Ramon Laguarta acknowledged in a call with analysts on Thursday that customers are hungry for better deals.
“For certain consumers, we need new entry-level prices and probably new types of promotional mechanisms that don’t expect the consumer to invest that much money in a salty snack purchase,” he said. “So there are adjustments that we have to make. … There is some value to be returned to consumers after three or four years of a lot of inflation.”
PepsiCo said it will try “a wide variety of combinations” of products, such as different snack foods and a wider range of price points. It also plans to lean on offerings branded as healthier that continue to sell well, such as PopCorners, Smartfood and Bare, and to expand its foreign snack lines, including Mexican brands Sabritas and Gamesa.
Also Thursday, Conagra reported a 2.3 percent decline in sales and a 1.8 percent decline in volume during the quarter that has largely concluded. The weak sales were driven by “continued lower consumption trends,” said the company, whose brands include Slim Jim, Banquet, Vlasic, Swiss Miss and Duncan Hines.
Food companies have seen “value-seeking behavior” among both lower- and higher-income customers over the past year, Conagra CEO Sean Connolly told analysts on Thursday.
“Some of it was based on reality — people had to make their household budgets work for them — and some of it was based on principle,” Connolly said. “Even higher-income shoppers didn’t like the prices in their baskets and they cut back on purchases.”
That pressure is expected to ease as consumers get used to the higher prices, Connolly said. Sales of the company’s snack foods and frozen foods, for example, are now nearly flat. A year ago, those categories were down sharply.
Lower-income consumers in particular have been struggling with inflation for years, said Connor Rattigan, an analyst who covers food at Consumer Edge. “There’s definitely still sticker shock because prices have gone up so quickly,” he said.
According to Bank of America analyst Peter Galbo, food companies such as Conagra have tried to sell more products with temporary discounts over the past six months.
“But a lot of the promotional activities they’ve put in place haven’t really worked,” Galbo said. “So now the question is whether they need more permanent price reductions.”
One of the growing threats to packaged goods companies like PepsiCo and Conagra is retailers’ private labels. Interest in private label grocery products increased during the pandemic, and customers stuck with them because the quality improved.
Walmart, which already has a handful of brands, unveiled a new private-label line of “chef-inspired foods” in April that are primarily priced in the $5 and under range. Walgreens said last month that it plans to expand its line and has already removed eight national brands from its health and wellness categories. Aldi and Lidl, Germany-based grocery chains that have grown rapidly during the pandemic, specialize in private-label products, though they also carry popular national brands.
Rachel Siegel contributed to this report.