Bosses of consumer products and packaged food companies are scratching their heads for reasons why consumer demand for their goods has slackened so much since the spring.
Stocks of those companies – locally based examples include Kraft Heinz and Conagra Brands, owner of familiar names like Birds Eye, Slim Jim, Duncan Hines and Reddi Whip – are down by well over 20% in 2023, disappointing investors. Each quarter this year sales have been softer than those executives anticipated in the previous quarter.
These companies are proffering lots of theories as to why. Consumers are becoming choosier. They’re prioritizing spending on experiences over convenient food options. This isn’t a long-term trend, just some short-term belt-tightening. Consumer habits are pretty much ingrained. Don’t worry, they’ll be back.
The most obvious explanation is one these CEOs tend to dismiss or de-emphasize. But it shouldn’t be. Many of these companies, if not most of them, simply hiked their prices too much in 2022.
What goes around comes around.
Households’ financial situations now are increasingly tighter. Consumers face continued high prices at the pump, rising utility prices, substantially costlier insurance premiums, and much steeper interest rates when they opt to finance purchases with their credit cards or buy a car or a home. According to Cox Automotive, the average interest rate on a new car is now 9.9%, and if you’re buying used and financing the deal, expect to borrow at north of 14%. Anyone with imperfect credit now faces interest rates in the range of 20%.
So it’s no wonder many consumers are taking a pass on that convenient single-serve frozen meal at the grocery store or buying cheaper private-label foodstuffs than the branded items from the likes of Kraft Heinz.
Seen the price of ketchup lately? After the double take, many shoppers will quickly hunt for alternatives to the brands they favored in the past.
These CEOs in many cases just don’t seem to want to come to grips with the obvious.
What the market seems to be saying emphatically right now is that the nosebleed charges for basic stuff that people accepted last year as they were emerging from their pandemic lifestyles aren’t OK anymore for a growing slice of the public.
The risk for these companies is that what looks to them now like temporary belt-tightening will morph into a longer-term change of habits. Keeping a mid-sized bottle of ketchup at close to seven bucks (nearly $10 at convenience stores) seems to us like an underappreciated roll of the dice.
Which of these companies will cave first and lower their prices – and perhaps even market that change – in the face of this consumer resistance? We feel safe in predicting one or more of these will do just that.
And, frankly, it can’t come soon enough. There’s more at stake here than the fortunes of some publicly traded behemoths.
The American economy overwhelmingly depends on consumer spending. Jane and Joe Consumer are responsible for two-thirds of our gross domestic product. Economists have marveled at the resilience of the U.S. consumer in the face of the pandemic, changing work habits and much higher prices.
Forecasts of deep recession late last year turned into predictions of a shallow recession earlier this year and now are landing on a “soft landing” consensus, even as we see clear signs of significant consumer stress. At some point, we fear, the tide will turn for the worse and our economy will suffer.
Raising prices simply because you can turns out to be bad business.
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