by Few prices are as visible to Americans as those they find at the supermarket or drive-through window, which is why two years of rapid food inflation have been a major drag on American households and the Biden administration.
Shoppers have slowly regained confidence in the state of the economy as they pay more to fill their carts, and President Biden has made a habit of shaming food companies, even filming a Super Bowl Sunday video criticizing food companies. sandwich producers for their “scam.” prices.
But now, the trend of inflation in supermarkets and restaurants seems about to change.
After months of rapid increases, the cost of food at home rose at a noticeably slower pace in January. And from packaged food suppliers to restaurant chains, companies across the food sector report that they are no longer raising prices as sharply. In some cases, this is because consumers are finally rejecting price increases after years of spending through them. In others, it’s because the prices companies pay for inputs like packaging and labor are no longer rising as sharply.
Even if food inflation cools, that doesn’t mean your grocery or restaurant bill will go down: it just means it will stop rising as quickly. Most companies are planning smaller price increases rather than outright price cuts. Still, when it comes to whether the rapid increases in supermarket and restaurant prices are behind us, what executives tell investors offers some reasons for hope.
Some consumers, but not all, say no.
Executives have discovered in recent months that they can only raise prices so much before consumers cut them.
Soft drink and snack maker PepsiCo had raised prices by double-digit percentages for seven consecutive quarters, and although that streak ended at the close of 2023, PepsiCo still raised prices by 9 percent in the final months of the year.
But all those price increases on soda and chips have started to take effect. The company recently recorded a surprise drop in sales.
Ramon Laguarta, CEO of PepsiCo, said on a recent earnings call that the company would be less likely to raise prices beyond “normal price levels” — about 2 to 3 percent per year. The company is seeing milder increases in ingredient costs and is focusing more on keeping sales up, he explained.
James Quincey, Coca-Cola’s chief executive, explained in a recent earnings call that the company had seen a stark divide among American customers: Some are under financial stress and facing a “real squeeze on purchasing power,” while that others “still have problems.” a lot of money, a lot of purchasing power” to spend on lactose-free milk and protein shakes.
And some companies, such as Restaurant Brands International, owner of Burger King, have reported continued resistance in the United States.
Consumer spending has been in “pretty good health,” Joshua Kobza, the company’s chief executive, recently told analysts.
Walmart, the country’s largest retailer, reported strong sales in the United States in the fourth quarter as more higher-income households turned to the value chain to buy groceries.
“We continue to see a customer that is resilient, but looking for value,” Walmart CEO Doug McMillon said during an earnings call Tuesday. He noted that prices for food and consumer products remain “slightly” higher than a year ago.
“Prices are lower than a year ago in places like eggs, apples and snacks, but higher in other places, like asparagus and blackberries,” he said.
Businesses are seeing a return to normal.
Some companies appear to be following the rest of the economy toward more moderate price changes. Headline inflation, as measured by the Consumer Price Index, peaked at 9.1 percent in the summer of 2022, but slowed to just 3.1 percent earlier this year, while inflation costs Food products such as beef, cereals and some types of dairy have been declining.
“Our prices overall are coming down in line with the kind of inflation that is returning to what I will call more normal levels,” Ian Borden, McDonald’s chief financial officer, said on a call with investors. (McDonald’s executives also noted that they were seeing some low-income customers spending less per visit.)
Shake Shack, the burger and ice cream chain, plans to raise prices by 2.5 percent this year, a return to the kind of increases that were normal before the pandemic, Katie Fogertey, the company’s chief financial officer, said in a recent earnings call. .
But he noted that some stores would need to raise prices more than that to offset rising costs. That’s particularly true in markets where workers are hard to find and larger price increases are needed to “offset wage inflationary pressures,” she said.
These comments underscore an important point. Many companies have taken advantage of inflation to boost profits, but over the past few years, a portion of supermarket and restaurant price increases have been aimed at covering higher costs. Wages have risen rapidly in the hospitality and retail sectors, and key ingredients have been expensive amid supply chain problems, the Russian invasion of Ukraine and attacks of bird flu.
Typically, companies at least try to raise prices when the cost of doing business increases to avoid losing profits. But as pressures on wages and input costs begin to fade, companies can stop aggressively raising prices without risking their bottom line.
Some companies are turning to technology.
Of course, there is a way to cover higher costs without raising prices: Companies can improve their productivity, so that each worker can stock more shelves, flip more burgers, or wait on more tables. That’s, in part, what Wendy’s is doing.
The fast-food chain is launching digital menus, hoping they will enable “immediate benefits for order accuracy, improving the crew experience” and enabling sales growth, said Kirk Tanner, the company’s chief executive. , in a recent earnings call.
The company also plans to test “dynamic pricing,” he said, using technology to change prices to meet consumer demand. Another company executive suggested that the company expected “low single-digit prices” this year.
All of this adds up to colder food inflation.
Taken together, the signs suggest that supermarket and restaurant inflation is likely to prove more moderate in 2024 than in the previous three years.
Many food-related input costs are falling or rising less aggressively. Wage increases remain high in food service, but are cooling toward normal. And consumers are starting to reject the kind of big price increases that companies were using to boost their profit margins.
Mike Swanson, chief agricultural economist at Wells Fargo, expects grocery inflation to cool to 0.5 percent this year – “much slower than it has been” – although restaurant inflation could remain stronger as people continue to open their wallets to eat out.
Even there, he said, “the trend will be downward.”
Jordyn Holman contributed reports.
