Executives at consumer products and packaged food companies have been scratching their heads since the spring as to why consumer demand for their products has weakened so much.
Shares of these companies — domestically based examples include Kraft Heinz and Conagra Brands, owners of familiar names such as Birds Eye, Slim Jim, Duncan Hines and Reddy Whip — are down more than 20% in 2023, disappointing investors. In each quarter this year, sales have been softer than the previous quarter’s expected guidance.
These companies have many theories as to why. Consumers are becoming more selective. They prefer to spend on experiences rather than comfort food options. This is not a long-term trend, just a bit of short-term belt-tightening. Consumer habits are almost ingrained. Don’t worry, they’ll be back.
The most obvious explanation is that these CEOs tend to dismiss or de-emphasize. But it shouldn’t be. Many, if not most, of these companies have raised their prices excessively in 2022.
What goes around comes around.
The financial situation of households is now becoming increasingly tight. When consumers choose to finance purchases or buy a car or home with credit cards, they face persistently higher prices at the pump, rising utility costs, significantly higher insurance premiums and steeper interest rates. According to Cox Automotive, the average interest rate on a new car is now 9.9%, and if you’re buying a used car and financing the deal, expect to borrow north of 14%. Anyone with imperfect credit now faces interest rates in the 20% range.
It’s no wonder that many consumers accept this convenient frozen meal at the grocery store or purchase private label foods that are less expensive than branded products like Kraft Heinz.
Have you seen the price of ketchup lately? After a double purchase, many shoppers will quickly look for alternatives to brands they liked in the past.
These CEOs are often unwilling to settle for the obvious.
What the market is firmly saying right now is that the nosebleed payments for essentials that people took for granted last year as they exited pandemic lifestyles are no longer appropriate for a larger segment of the public.
The risk for these companies is that what appears to them to be a temporary belt-tightening now will turn into a longer-term habit change. Keeping a medium-sized bottle of ketchup around seven dollars (about $10 at grocery stores) seems like an underrated roll of the dice to us.
In the face of consumer resistance, which of these companies will be the first to cut prices or even enter a changing market? We feel safe in predicting that one or more of these will do so.
Honestly, it can’t come soon enough. There is more at stake here than the fortunes of some publicly traded behemoth.
The American economy is largely dependent on consumer spending. Jane and Joe Consumer are responsible for two-thirds of our gross domestic product. Economists have been impressed by the resilience of the U.S. consumer in the face of the pandemic, changing work habits and higher prices.
Forecasts of a deep recession at the end of last year turned into forecasts of a shallow recession at the beginning of this year, and while we now see clear signs of significant consumer stress, a “soft landing” is reaching consensus. We fear that at some point the tide will worsen and our economy will suffer.
Raising prices just because you can is bad business.
Comment: US policy largely discourages having children. Our economy is paying for it.