PepsiCo's Q3 revenue hits a four-year low, analysts: retribution for crazy price hikes has arrived!
Since 2020, the prices of PepsiCo's salty snacks, carbonated beverages, and sports drinks have increased by an average of 41%. Some analysts believe that PepsiCo may have to reverse its loss-making situation by offering more discounts
Affected by the decline in performance of its Frito snack division, PepsiCo's Q3 revenue and profit both declined, leading to a downward revision of its full-year sales growth guidance.
The latest financial report shows that PepsiCo's Q3 revenue fell by 0.6% year-on-year to $23.32 billion, below the market's expectation of $23.76 billion, marking the worst performance in four years; net profit attributable to shareholders fell by 5.18% year-on-year to $2.93 billion, also below expectations; adjusted earnings per share increased by 5% year-on-year to $2.31, exceeding the market's expectation of $2.29.
Facing the bleak situation of declining revenue and profit, the company explained during the financial report conference call that it was mainly due to a decrease in consumer spending and geopolitical tensions.
PepsiCo CEO Ramon Laguarta stated:
"The performance of categories in North America has been weak due to the impact of the Quaker North America product recall, and certain international markets have experienced business interruptions due to geopolitical tensions."
Furthermore, PepsiCo also lowered its annual sales growth guidance for the fiscal year 2024, expecting organic revenue to grow by 1-3% for the full year, lower than the previous target of 4%.
Weakest performance in four years, the cost of aggressive price hikes?
A significant reason for PepsiCo's weak performance is attributed to high pricing.
According to data from the Federal Reserve Bank of St. Louis and TD Cowen, since 2020, the average prices of PepsiCo's salty snacks, carbonated beverages, and sports drinks have increased by 41%; over the past five years, the average price of potato chips in US convenience stores has increased by 47%, and the price of a 12-pack of soda has increased by 66%.
An analysis by market research firm Upside this year found that due to cost concerns, consumers have reduced their trips to convenience stores and purchased fewer items.
TD Cowen analyst Robert Moskow pointed out that PepsiCo may have to reverse its losses by offering more discounts.
Moskow cited that although Frito-Lay's sales volume declined by 1.5% in Q3, promotional activities for the department's products during the same period helped boost sales.
However, these measures are evidently not sufficient. Moskow noted:
"We believe that this staged strategy to boost sales is not broad enough (possibly accounting for only 18-21% of total sales at a time) and is not enough to substantially improve the sales trend of the entire business."
Moskow expects that Frito-Lay will expand its discount brand range in the 2025 fiscal year, potentially bringing about a mild growth of up to 2%.
Grocery prices gradually becoming a consumer "pain point"
PepsiCo's price hikes are not isolated cases. With US inflation continuing to rise post-pandemic, price increases have been squeezing consumers' wallets.
Although recent months have shown signs of inflation slowing down in the US, data indicates that the annual inflation rate for groceries in the US has significantly slowed down since reaching a peak of 13.5% in August 2022.
However, some economists suggest that the negative impact of previous price increases will continue for several years. Economist Paul Shea from Bates College in Maine pointed out that although the inflation of food and grocery prices has decreased, due to consumers' habituation to the stability of prices in this category, the actual perception of inflation is "disconnected" from the professional interpretation of economists. Against the backdrop of an increase in the absolute prices of groceries (the actual amount consumers pay when purchasing), the impact will last longer.
Moreover, given that prices in sectors such as housing, automobiles, and health insurance in the United States have begun to outpace the growth rate of average worker wages, the price increase of groceries may bring additional pressure to the wallets of American consumers, exacerbating resistance emotions.
Jeremy Horpedahl, Director of the Arkansas Economic Research Center and economist, pointed out:
"Although this is only a small part of people's consumption expenditure, the impression left can be profound - when they see these high prices, they will continue to be impacted."