Consumers accept price increases as PepsiCo earnings soar
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Consumers are stomaching steep price increases in junk food — if PepsiCo's earnings are any indication.
Why it matters: The effect of inflation on people's spending is a key determinant in the economy's well-being — and we'll find out the latest on Thursday when the federal government reports the Consumer Price Index figures for September.
Driving the news: PepsiCo ripped off a blistering third quarter, reporting stronger-than-expected revenue and profit on Wednesday.
- Organic revenue soared 16%, compared with a year earlier, while core earnings per share (when factoring out currency volatility) rose 14%.
- "They’re just passing through higher costs," and "consumers haven’t shown any willingness to trade down so far," CFRA Research analyst Garrett Nelson tells Axios.
State of play: With inflation raging, PepsiCo's recent price increases have been "significant," Goldman Sachs analyst Bonnie Herzog said Wednesday in a research note.
- PepsiCo reported Wednesday that prices drove a 17% increase in net revenue growth, while organic volumes fell by only 1%.
- "The truth is that our brands ... are being stretched to higher price points and consumers are following us," PepsiCo CEO Ramon Laguarta said on a conference call.
- "Large well-known brands such as Doritos, Cheetos, Lay's, Ruffles, Tostitos and Fritos all delivered," Herzog said.
Zoom out: They're not the only ones having success with price hikes.
- Last week, Conagra Brands, parent of the Duncan Hines, Slim Jim and Hunt's brands, reported that its organic quarterly sales rose 9.7% — which included a 14.3% boost due to prices and a 4.6% decline in volume.
- Consumers tend to recoil from price increases "in the immediate aftermath" — but that effect "wanes over time as consumers adjust," Conagra CEO Sean Connolly told investors on a conference call last week.
Yes, but: One reason PepsiCo might be succeeding with price spikes is because consumers are increasingly spurning price-hiking restaurants to eat at home, Nelson notes.
- "There's a higher level of at-home food consumption than there was prior to the pandemic," he says.
The bottom line: At least in some areas of the economy, consumers might grumble about it, but they're getting used to higher prices.
