Pepsi and Conagra feel pain as consumers refuse to accept higher prices

“We’re seeing consumers become very price-sensitive,” said Bobby Gibbs, a partner in the retail and consumer goods practice of consulting firm Oliver Wyman. “Consumers are increasingly opting for promotional prices, and retailers are offering more promotional prices than they have in the past few years.”

And 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 are up 18 percent since 2020, but the latest inflation report released Thursday shows they are stabilizing.

Total “food at home” costs rose just 0.1% in June compared with the previous month. Prices for some key budget items are already falling: fruit and vegetables fell 0.5%, while cereals and bakery products fell 0.1%.

The results from PepsiCo and Conagra show that consumers frustrated by rising prices are now spending less on established brands, especially in snacks and soda.

PepsiCo, which produces not only its namesake soda but also other beverages, Frito-Lay snacks and Quaker cereals, raised prices 5 percent in the second quarter and reported a drop in unit sales. 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 all announced in May that they were cutting prices on a range of grocery items.

PepsiCo Chief Executive Ramon Laguarta acknowledged in a call with analysts on Thursday that customers are hungry for better deals.

“For specific consumers, we need new entry prices and probably new promotional mechanisms that don’t expect the consumer to invest so much money into buying salty” snacks, he said. “So we need to make some changes. … There’s some value to give back to consumers after three or four years of high inflation.”

PepsiCo said it will try a “wide range of combinations” of products, such as a variety of snack packs, and a wider range of prices. It also plans to focus on healthier offerings that continue to sell well, such as PopCorners, Smartfood and Bare, and build out its international snack lines, including Mexican brands Sabritas and Gamesa.

Also Thursday, Conagra saw sales decline 2.3% and volume decline 1.8% year over year. mostly completed the quarter. The weak sales performance was due to “continued lower consumption trends,” according to the company, whose brands include Slim Jim, Banquet, Vlasic, Swiss Miss and Duncan Hines.

Conagra Chief Executive Sean Connolly told analysts Thursday that over the past year, food companies have seen “value-seeking behavior” among both lower- and higher-income consumers.

“Some of it was reality—people had to make their household budgets work for them—and some of it was policy,” Connolly said. “Even higher-income customers generally didn’t like the prices they saw in their baskets and cut back on purchases.”

Connolly said those pressures are expected to ease over the course of the year as consumers become more comfortable with higher prices. For example, the company’s snack and frozen food sales are now essentially flat. A year ago, those categories were in steep decline.

Lower-income consumers, in particular, have struggled with years of inflation, said Connor Rattigan, a food analyst at Consumer Edge. “We’re definitely still feeling the price shock because prices have gone up so quickly, so fast,” he said.

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

“But a lot of the promotional efforts they put in place didn’t work,” Galbo said. “So now the question is whether they need more permanent price cuts.”

One growing threat to packaged goods companies like PepsiCo and Conagra is retailers’ own brands. Interest in private-label foods has surged during the pandemic, and shoppers have stuck with them as quality has improved.

Walmart, which already has several brands, unveiled a new line of private-label “chef-inspired foods” in April, mostly in the $5 and under price range. Walgreens last month said it planned to expand its offerings and has already removed eight domestic brands from its health and wellness categories. Aldi and Lidl, German grocery chains that have expanded rapidly during the pandemic, specialize in private-label products, although they also offer popular national brands.

Rachel Siegel assisted in the preparation of this report.