Editorial: Turns out it’s bad business to jack prices just because you can
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. As we noted last year, cost pressures in the news every day and consumers temporarily flush with pandemic-era benefits gave the businesses cover to fatten their profit margins well beyond what was required to cope with their own inflationary pressures.
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.
Conagra CEO Sean Connolly explained things this way on his Oct. 5 quarterly call with analysts. Consumers, he said, “have shifted from meals (for) one to meals (for) many, even if not everyone is home at the same time to eat together. And the last shift I will mention is a reduction in wasted food and an increase in the use of leftovers. Collectively, these short-term behavior shifts act as a sort of cheat code to help these consumers spend within their means.”
Cheat code? That sounds to us like a rational consumer response to a phenomenon that ought to give these companies pause beyond a couple of quarters of soft sales. Once people who’ve relied on frozen dinners learn how easy it is to prepare their own meals, might they decide simply to continue doing that?
Connolly, to be sure, isn’t alone. Executives at rivals are saying much the same thing. There’s a simple reason why. They all are fiercely resisting rolling back the prized price gains they achieved post-pandemic.
An analyst in early August asked Kraft Heinz CEO Miguel Patricio whether the company hiked prices too much given that some competitors didn’t match the increases. He was blunt.
“I would do everything again,” he said. “We are leaders in the vast majority of categories where we play. … I mean, we can always go back on price if we think we have to … but we had to lead price increases.”
Did you?
Fortunately for all of us, there’s something called the free market. 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.
A little over a year ago, we bemoaned how difficult it is these days to comparison shop, particularly online, and how that seemed to be feeding inflation. Obtaining the best prices online remains a challenge. Not so in the grocery aisle. A motivated consumer can do so with relative ease.
There’s no small part of us rooting for a comeuppance. Raising prices simply because you can turns out to be bad business.
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