Grocery inflation is finally showing signs of slowing down, and food companies are beginning to feel the pressure.
On Thursday, snack giants PepsiCo and Conagra Brands revealed in their quarterly earnings reports that they experienced lower revenue and unit sales, as cost-conscious consumers are pushing back against higher prices. This trend is also evident in recent government data: the Bureau of Labor Statistics reported that food prices saw only a slight increase last month.
“We’re seeing consumers be very price sensitive,” said Bobby Gibbs, a partner in the retail and consumer goods division of marketing consulting firm Oliver Wyman. “Consumers are cherry-picking promotional prices more, and retailers are offering more promotional pricing than they have in the past few years.”
Despite a technically strong economy, prices for many goods remain higher than pre-pandemic levels, and household debt has increased. Since 2020, grocery prices have risen by 18 percent, though the latest inflation report released on Thursday shows these prices beginning to level off. The overall cost of “food at home” rose by only 0.1 percent in June compared to the previous month. Some key budget items are already seeing price drops, with fruits and vegetables down by 0.5 percent and cereals and bakery products down by 0.1 percent.
PepsiCo’s and Conagra’s results indicate that consumers frustrated by rising prices are now spending less on established brands, particularly in the snack and soda categories. PepsiCo, which produces not only its namesake sodas but also other beverages, Frito-Lay snacks, and Quaker cereals, raised prices by 5 percent in the second quarter, resulting in a decrease in unit sales. North American volumes fell by 4 percent for Frito-Lay and 3.5 percent for PepsiCo Beverages.
Retailers are responding to these shifts. In May, Target, Aldi, Amazon, and Walmart announced they were rolling back prices on many grocery items. PepsiCo’s chief executive, Ramon Laguarta, acknowledged on a call with analysts that customers are seeking better deals. “For particular consumers, we need new entry price points and promotional mechanics that don’t require consumers to invest so much cash in purchasing salty snacks,” he said. “There are adjustments we have to make… There is some value to be given back to consumers after three or four years of a lot of inflation.”
To address this, PepsiCo plans to experiment with various product combinations, such as variety packs of snacks, and offer a wider range of prices. The company also aims to focus on its healthier brands, which continue to perform well, such as PopCorners, Smartfood, and Bare. Additionally, it will expand its foreign snack lines, including Mexican brands Sabritas and Gamesa.
Conagra, on the other hand, reported a 2.3 percent sales decline and a 1.8 percent decrease in volume for its recent quarter. The company’s soft sales were driven by “continued lower consumption trends.” Conagra’s brands include Slim Jim, Banquet, Vlasic, Swiss Miss, and Duncan Hines. Conagra’s chief executive, Sean Connolly, noted that food companies have been observing “value-seeking behavior” over the past year among both lower-income and higher-income customers.
“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.” He expects these pressures to wane throughout the year as consumers grow accustomed to the higher price points. For instance, the company’s sales of snacks and frozen foods have now stabilized, whereas a year ago, these categories were in steep decline.
Lower-income consumers, in particular, have been hit hard by years of inflation, noted Connor Rattigan, an analyst 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 like Conagra have attempted to boost sales through temporary discounts, according to Bank of America analyst Peter Galbo. “But a lot of the promotional activity 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 growing threat to packaged goods companies like PepsiCo and Conagra is the rising popularity of retailers’ private-label brands. Interest in store-brand grocery items increased during the pandemic, and customers have continued to favor them as their quality has improved. Walmart, which already has a handful of private brands, unveiled a new lineup of “chef-inspired food” mostly priced at $5 and under in April. Walgreens also plans to expand its private-label line and has already removed eight national brands from its health and wellness categories. Aldi and Lidl, German-based value grocery chains that expanded rapidly during the pandemic, specialize in private-label products but also carry popular national brands.
As grocery inflation continues to slow, food companies must adapt to changing consumer behaviors and preferences to maintain their market share and revenue.
