PepsiCo plans price cuts as demand for its drinks and snacks slips

PepsiCo Slashes Chip Prices to Win Back Budget-Conscious Consumers

PepsiCo announced Tuesday it will lower prices on popular snack brands including Lay’s, Doritos, Cheetos, and Tostitos in an effort to recapture customers who have become increasingly frustrated by years of price hikes.

During a conference call with investors, PepsiCo Chairman and CEO Ramon Laguarta acknowledged the affordability challenges facing many consumers. “For some consumers, low- and middle-income consumers, the biggest friction they have today in our category… is affordability,” Laguarta said. “So we have been testing multiple ways to give them affordability.”

The food and beverage giant has repeatedly raised prices in recent years as the cost of packaging, ingredients, and transportation climbed. In the fourth quarter alone, PepsiCo implemented a 4.5% global price increase, with North American beverage prices rising by 7% and snack prices increasing by 1%.

These price hikes have boosted revenue, with the company reporting a 5.6% increase to $29.3 billion in the October-December period, exceeding analysts’ expectations of $28.9 billion. However, the strategy has also dampened consumer demand, with many shoppers switching to cheaper alternatives or reducing purchases altogether.

The impact on sales volume has been significant. PepsiCo reported a 1% decline in snack volumes and a steeper 4% drop in North American beverage volumes during the most recent quarter. While global beverage volumes rose by 1%, food volumes fell by 2%.

Laguarta revealed that the company had already begun testing price reductions in select markets during the second half of 2023, with encouraging results. “Volume return is pretty good, and that’s what the category needs,” he noted.

The price-cutting initiative is part of a broader strategy announced in December following pressure from Elliott Investment Management, an activist investor that acquired a $4 billion stake in PepsiCo last September. Elliott has been pushing for changes to address slowing growth and declining profits in the company’s North American operations.

Beyond pricing adjustments, PepsiCo is also accelerating the introduction of products with simpler and healthier ingredients to appeal to changing consumer preferences. New offerings include Gatorade Lower Sugar and Simply NKD versions of Cheetos and Doritos that contain no artificial flavors or colors. The company is also preparing to launch Lay’s potato chips made with avocado oil and olive oil.

“Younger households, in particular, love PepsiCo’s products but won’t shop the category unless the company offers versions without artificial ingredients,” Laguarta explained during the call.

The company is further responding to growing consumer interest in functional ingredients with products like Doritos Protein and Pepsi Prebiotic. The latter reportedly sold out within 30 hours of its Black Friday introduction and will soon be available nationwide.

The strategic shifts appear to be paying off. PepsiCo reported fourth-quarter net income of $2.54 billion, or $1.85 per share, up from $1.52 billion, or $1.11 per share, during the same period last year. Adjusted for one-time items, earnings reached $2.26 per share, surpassing analyst expectations.

Investors responded positively to the announcements, with PepsiCo shares rising 2.5% in morning trading on Tuesday.

The price reductions come at a critical time for the consumer packaged goods industry, which has faced criticism for maintaining high prices even as inflation moderates and input costs stabilize. Industry analysts suggest PepsiCo’s move could pressure competitors to follow suit, potentially triggering broader price adjustments across the snack food category.

For consumers who have faced years of escalating grocery bills, these price cuts may provide welcome relief, particularly for household staples like chips and beverages that represent frequent purchases for many American families.