The New York Times published an article on December 11 about how Corporate America is testing the limits of its pricing power. I love the premise.
Here in Canada, where I live, the common refrain from the media and anti-poverty groups is to blame grocery stores for the high cost of goods. The federal government has even cajoled the three top chains to agree to work together to stabilize food prices.
It’s much easier for the federal government to try to work with three retailers rather than hundreds of suppliers. But the reality is that here in Canada, like in the U.S., it is more likely that suppliers are the ones pushing the higher prices agenda, not the grocery stores.
“‘We may have prices changing more quickly than they have before.’ That could mean up or down, though companies are generally more eager to raise prices than cut them,” Pricing Lab co-lead Alexander MacKay stated.
As the article points out, virtually every sector in the S&P 500 has higher margins today than in the past decade. They are testing the limits of consumers’ willingness to pay for products. It finishes by suggesting customers are rebelling.
These three consumer stocks could get burned by their presumed pricing power.
PepsiCo (PEP)
How much are PepsiCo’s (NASDAQ:PEP) price increases helping its profits?
The maker of soda pop, energy drinks and snack foods reported its Q3 2023 results on Oct. 10. For the 36 weeks ended Sept. 9; its organic volumes were down 3% year-to-date, with a 14% increase in average prices. That translated into an 8.9% increase in revenue to $63.62 billion and an adjusted operating profit of $10.3 billion.
It’s been so good for PepsiCo this year that it raised its 2023 profit forecast for the third time when it reported its results in October. It now expects core earnings per share of $7.54, up from its original February projection of $7.20, a nearly 5% increase in eight months.
PepsiCo’s confident it can get pretty close to the sun.
“I don’t think our margins are going to deteriorate at all,” The Times reported CFO Hugh Johnston’s comments from April in a TV interview with Bloomberg. “In fact, what we’ve said for the year is we’ll be at least even with 2022, and may in fact increase margins during the course of the year.”
Through the first nine months of 2023, its gross margin was 54.8%, 130 basis points higher than a year earlier. There’s the margin increase Johnston was talking about.
With its stock down 7% over the past year, it looks as though price increases haven’t appeased investors. If they irritate consumers in 2024, those losses could accelerate significantly.
Kraft Heinz (KHC)
Kraft Heinz (NASDAQ:KHC) said in February it wouldn’t increase prices further in 2023, suggesting it expected consumer pushback in the year’s second half.
That doesn’t appear to have happened.
In May, it reported Q1 2023 results that included a 14.7% price increase, offsetting a 5.3% decrease in volume. In August, it reported Q2 2023 results. Kraft had an 11.0% price increase, offset by a 7.0% decline in volume. It reported Q3 2023 results in early November. Like a broken record, prices were 7.1% higher, offset by a 5.4% decline in volume.
Kraft Heinz would argue these results are year-over-year (YoY), so, technically, prices could have stopped rising in February, but the YoY would still be higher. We’ll know more in February when it reports fourth-quarter results. In the end, prices will be up for 2023.
Perhaps the company hasn’t been quite as greedy as PepsiCo, but consider what higher prices have done to profits despite a 5.9% volume reduction through the first nine months.
The adjusted gross margin Q1 through Q3 2023 was 33.4%, 240 basis points higher than Q1 to Q3 2022. Even better, Q3 2023 adjusted gross margin was 34.0%, 400 basis points higher.
Higher prices and lower costs: You’ve got to love it unless you live on a fixed income.
McDonald’s (MCD)
Again, lower-income customers suffer the most when Corporate America tries to wring as many dollars out of the entire population as it can. McDonald’s (NYSE:MCD) is one of those companies.
“‘We continue to gain share with both the middle- and higher-income consumers,’ Ian Borden, chief financial officer of McDonald’s, said on an October earnings call, although he noted that the company was seeing its lower-income customers struggle,” The Times reported.
I don’t want to put too fine a point on this subject, but doesn’t anyone have a problem with McDonald’s making their margin targets off wealthier individuals, leaving lower-income customers to go elsewhere (quite possibly a food bank) for a meal? I sure do.
In what universe does it make sense that wealthy people eat at McDonald’s?
Like Kraft Heinz, McDonald’s suggests it has stopped raising prices.
It reported Q3 2023 results at the end of October. Same-store sales grew by 8.8%, 80 basis points higher than analyst estimates. But prices affected U.S. customer traffic. The CFO said it slowed price increases in the third quarter. That said, they’ll finish the year up 10% over 2022.
As a result of price increases, revenue in Q3 2023 increased 14%, to $6.69 billion, while its net income rose 17%, to $2.3 billion.
You can thank Warren Buffett for the strong showing in the latest quarter.
On the date of publication, Will Ashworth did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.