Pricing is no longer an option for big food companies, writes Victor Martino.

One of the most pressing issues currently facing consumer packaged goods companies in the US market is the growing frustration Americans are feeling at the cost of putting food on the table.

Consumer sensitivity to price increases, particularly for food, has taken a much more serious turn than has been the case over the last few years, despite the fact that grocery price increases have largely levelled off.

The US government’s July consumer inflation report, for example, showed grocery prices rose just slightly over 1% in the last 12 months, which is a big improvement from the previous year, when prices jumped around 5%, and the year before that, when they soared by double digits.

Consumer sentiment shifts

In a new report, financial intelligence services company Moody’s Analytics has zeroed in nicely on the changing consumer sentiment on grocery prices.

According to the report, the fact that prices are not going up anymore is not appeasing consumers, especially low and middle-income people who have felt the brunt of rising costs. Instead, they want to see prices drop, which in the aggregate isn’t happening.

What is concerning consumers is the change in prices over the past few years, according to the report. Aggregate retail prices are up a scant 0.1% over the last year. However, they are up 17.4% over the last five years, compared to a 2.6% rise in the previous five years.

Food-at-home prices in the aggregate are up by about 25% since 2019, according to data from the US Department of Agriculture.

Many consumers have reached their limit when it comes to paying higher prices for major brands and are pushing back in a variety of ways, including trading down to lower-priced store brands and even not buying certain brands and products at all.

Sales dropping

This is something a number of consumer packaged goods companies have noted in their recent earnings calls.

For example, when PepsiCo reported its earnings in July, it noted that sales of its Frito-Lay snacks fell during the most recent quarter and attributed much of that drop in sales to consumers rejecting higher prices by cutting back on buying chips altogether or by trading down to lower-priced store brands.

PepsiCo CEO Ramon Laguarta went as far as to note that price sensitivity has grown so strong in the US that it exists among all income groups.

Conagra Brands, which like PepsiCo last month reported lower revenue and unit sales for its most recent quarter, also attributed a significant portion of the decline to cost-conscious consumers pushing back on higher prices.

Both PepsiCo and Conagra have raised prices numerous times over the last few years without seeing much in the way of negative consequences.

This new consumer sensitivity to price increases is for the first time in many years resulting in significant shifts in shopper behaviour, according to my research and analysis and that of others.

Consumers cherry-picking

Bobby Gibbs, a partner at US-based consumer packaged goods and retail consulting firm Oliver Wyman, recently said the firm is seeing consumers being very price sensitive and that they’re cherry-picking promotional prices more than before.

In the latest Beige Book, which came out last month, most Federal Reserve Bank districts noted that price-sensitive consumers are buying fewer items and trading down to lower-priced brands.

Senior executives of major grocery retailers such as Walmart and Target are also noting that they’re seeing an uptick in consumer price sensitivity and it’s being reflected in increased sales of store brands. This is evidence of consumers being fed up with big brand price increases in many categories and pushing back by trading down to less expensive private-label brands.

Buying less per store visit is also being reflected at grocery stores in reduced basket sizes and the average ring metric.

No more pricing

Americans are refusing to continue to pay ever-increasing prices for groceries, particularly major brands. These are the brands that over the last few years have been able to raise prices without significant consumer pushback, often resulting in record revenue and profits.

This frequent price increase phenomenon, like the inflation that enabled it, has now come to an end. The reluctance of consumers to keep paying more for groceries has exerted pressure on packaged goods companies to slow or even eliminate planned price increases.

Some consumer packaged goods companies have thus far addressed the new, stronger consumer price sensitivity phenomenon with deeper, longer and more frequent retail promotions. This can help to boost flagging sales in the short-term but it’s not a good longer-term strategy.

The dangers of shrinkflation

Shrinkflation is another tool brands have been using to address consumer price-sensitivity. It’s been successful overall but I think it’s reaching the end of its efficacy because consumers have tired of it and government regulatory authorities, elected officials and even President Biden have criticised packaged goods companies for employing the practice.

As such, shrinkflation is fast becoming a practice that can contribute to brand loyalty erosion and reduced trust from consumers.

Better than shrinkflation is to perhaps introduce new, smaller sizes of key SKUs in order to be able to offer more competitive prices. We’ve seen brands doing this in the dollar store retail channel and it works well there. Key, of course, is to get traditional format retail chains to agree to make shelf space available for the smaller product versions.

Inflection point reached

Packaged foods companies are now at an inflection point and need to pivot from the inflationary years when raising prices became the norm to a new, non-inflationary economic environment where the focus needs to be on value proposition enhancement, which includes a focus on highlighting the unique qualities or superior performance of brands and products.

This can include better ingredients, longer-lasting effects or healthier options. Quality, value and differentiation have never been more important to brands and products than they are today.

Additionally, price and promotional strategy and management, cost management, leveraging technology, innovation and new product development, supply chain optimization, retail partnerships, communication and transparency are all extremely important in this challenging time of consumer price sensitivity.

Packaged foods companies also shouldn’t rule out rolling back prices when they are able to achieve a reduction in cost of goods. With grocery prices having increased by on average 20-30% over the last five years, even a 5%-10% price reduction can stand out in the minds and impact the pocket books of consumers, particularly if communicated properly from a marketing standpoint.

The threat from private-label

Unlike in the past in the US, private-label or store brands are now a serious threat to manufacturers' packaged food brands. This is the case even without the enhanced consumer price-sensitivity and buying behaviour changes we’re seeing today. Add this factor to it and the threat is even more serious.

More than one-quarter of the products sold at retail in 2023 were private-label, according to a March 2024 report from Circana.

The report noted that total unit sales of private-label CPG products (vs. traditional brands) was 25.5% in 2023, up from 24.7% in 2022. Total dollar sales of store brand products were more than $217bn, up 6% in 2023 over the previous year, with unit sales up nearly 1%.

The Private Label Manufacturers Association (PLMA) is projecting a circa 4.7% sales increase for private label CPG products this year over 2023.

Changes in buying behaviour

US consumers are frustrated with the high cost of food and are changing their buying behaviour, primarily trading down and not buying to the degree they have in the past in categories such as snack foods. This is negatively impacting the revenue and profits of food companies like PepsiCo, Conagra and numerous others.

The price increase runway for these companies has pretty much run out.

Expect to see deeper and more frequent promotion throughout the rest of this year.

Also expect to see many packaged food companies holding off on planned price increases and in many cases actually absorbing small input cost increases rather than reflecting them in price increases as they’ve been doing for the last few years.

We’re at a pivotal time. Consumers are increasingly taking food price inflation into their own hands via changing their buying behaviour.

There’s still room for premiumisation and premium product price points, particularly in the early-stage and emerging brand spaces, but all brands across all consumable categories will have to put an emphasis on value in this time of enhanced price sensitivity.

Just Food columnist Victor Martino is a California-based strategic marketing and business development consultant, analyst, entrepreneur and writer, specialising in the food and grocery industry. He is available for consultation at: victorrmartino415@gmail.com