Pepsi and ConAgra Feel the Pain as Consumers Reject Higher Prices

“We see consumers becoming very price sensitive,” said Bobby Gibbs, a partner in the retail and consumer goods practice at marketing consultancy Oliver Wyman. “Consumers are choosing promotional prices more, and retailers are offering more promotional prices than they have in the past few years.”

While the economy is technically strong, prices for many goods remain higher than they were before the pandemic, and household debt has risen. Grocery prices have risen 18% since 2020, but the latest inflation report released Thursday shows them holding steady.

The cost of “food at home” rose by just 0.1% in June compared to the previous month. Prices for some key budget items have already started to fall: fruit and vegetables fell by 0.5%, while cereals and bakery products fell by 0.1%.

PepsiCo and ConAgra's findings suggest that consumers frustrated by higher prices are now spending less on established brands, especially in the snack and soft drink aisles.

PepsiCo, which makes not only its own soft drinks but also other beverages, Frito-Lay snacks and Quaker cereals, raised its prices by 5% in the second quarter, and saw unit sales shrink. Sales volumes in North America fell 4% for Frito-Lay, one of the company’s most prolific snacks businesses, and 3.5% for PepsiCo’s beverage division.

Some retailers have already responded. Target, Aldi, Amazon and Walmart announced in May that they would refund prices on many food items.

PepsiCo CEO Ramon Laguarta acknowledged on a call with analysts Thursday that customers are craving better deals.

“For consumers in particular, we need some new entry points and maybe some new promotional mechanisms that don’t expect the consumer to invest a lot of money in buying salty snacks,” he said. “So there are adjustments that we have to make … there is some value that can be returned to consumers after three or four years of significant inflation.”

PepsiCo said it will experiment with a “broader range of product combinations,” such as snack variety packs, and a broader range of prices. The company also plans to pivot to healthy-branded offerings that still sell well, such as Pop Corners, Smart Food and Bear, and build out foreign snack lines, including Mexican brands Sabritas and Gamesa.

Also Thursday ConAgra reported a 2.3 percent sales decline and a 1.8 percent volume decline during The fourth quarter of last year was completed. The weak sales figures were driven by “continued low consumption trends,” according to the company, whose brands include Slim Jim, Banquet, Vlasic, Swiss Miss and Duncan Hines.

Food companies have seen “value-seeking behavior” over the past year, among both low- and high-income customers, ConAgra CEO Sean Connolly told analysts on Thursday.

“Part of it was based on reality — people needed to make their household budgets work for them — and part of it was about principle,” Connolly said. “Even high-income customers didn’t like the prices they saw in the shopping basket on principle, and they were cutting back on their purchases.”

Connolly said those pressures are expected to ease over the course of the year as consumers get used to higher price points. For example, the company’s sales of snacks and frozen foods are now essentially flat. A year ago, those categories were in steep decline.

Low-income consumers in particular have been suffering from inflation for years, said Conor Rattigan, a food analyst at Consumer Edge. “There’s no doubt there’s been a price shock, where prices have gone up very quickly,” he added.

Over the past six months, food companies like ConAgra have tried to use temporary discounts to sell more products, said Peter Galbo, an analyst at Bank of America.

“But a lot of the promotions they did didn’t really work,” Galbo said. “So the question now is whether they need to do more permanent price cuts.”

One growing threat to packaged goods companies like PepsiCo and Conagra is store-branded grocery. Interest in store-branded grocery products has surged during the pandemic, and customers have stuck with them as quality has improved.

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

Rachel Siegel contributed to this report.