PepsiCo feels squeeze as financial pressure spreads from low-income consumers

By Jessica DiNapoli and Ananya Mariam Rajesh

NEW YORK (Reuters) – PepsiCo (NASDAQ:) CEO Ramon Laguarta said Thursday there is “much more price sensitivity” across U.S. income groups and not just low-income consumers, highlighting its sensitivity to broad shifts in consumer demand.

The Diet Pepsi and Tostitos tortilla chips maker, which fell short of Wall Street expectations for revenue for its second quarter Thursday, said consumers continued to face a squeeze from rising prices and constrained wages.

“They’re saying ‘There’s been a lot of inflation and my disposable income is stretched,'” Laguarta said in an interview. “It’s not only the lower-income consumer, it’s throughout.”

Companies like PepsiCo hiked prices by double digits during and after the pandemic to recoup once-in-a-generation levels of cost inflation. On Thursday, the New York-based company said it had raised prices by 5% overall in the most recent quarter ended June 15, helping protect its margins which rose compared with a year before.

Costs have started to come down, with U.S. consumer prices unexpectedly falling in June. But some costs, like agricultural commodities, remain elevated, PepsiCo said Thursday in prepared remarks.

Laguarta had said in April that lower-income consumers were “stretched” and “strategizing a lot to make their budgets get to the end of the month.”

In a call with analysts Thursday, he said higher-income consumers were skipping meals at expensive restaurants and dining at cheaper ones instead, or opting out of them altogether for at-home entertainment options.

“Once we address that situation, we’ll be back in growth, and we feel pretty good about the tools and the resources we have,” Laguarta said.

PepsiCo is investing in parts of its Frito-Lay North America business, its second-largest after beverages, to keep consumers buying its popcorn, potato and tortilla chips.

The company is also looking to cut costs and make its business more efficient, Laguarta said.

Brian Jacobsen, chief economist at Annex Wealth Management, said: “Consumers are feeling the pinch of high prices. Last year the consumer was told to just be quiet and accept higher prices. Now they’re fed up.

“Wage gains are okay, but they’re not great, so consumers are rebelling by cutting back on non-essentials and shopping around for everything else,” Jacobsen added. “It’s not a trend that’s anything to worry about. It’s just a return to prudence instead of profligacy.”