Kelly Evans: Chips are too expensive


Doritos. Pita chips. Ruffles. We're not talking about semiconductors here. We're talking about the price of actual salty snacks, which has evidently gone up too far.  

Bryan Spillane from Bank of America was on to talk about this yesterday. Volumes for the category, which encompasses chips, Cheez-Its, popcorn, and so forth, have turned negative on the year. Sales overall are barely higher, up 0.2% since January, after a scorching 9% average increase in the past three years, boosted by inflation.  

This is exactly the kind of inflection point that Nancy Lazar over at Piper Sandler has been anticipating. Corporate revenues, she warns, "are at risk of outright declining" as consumers go on strike and start pushing back on the massive price hikes we've seen in recent years.  

And that jells with what companies like Pepsi and Mondelez have experienced this year. At Pepsi, which owns Ruffles, Pringles, and Doritos, "promotions are increasing while volumes decrease," notes Spillane. At Mondelez, the maker of Ritz and Wheat Thins, "promotions are not providing the intended lift," and management hinted that "prices may be too high" at a recent conference.  

Some shoppers might say, gee, ya think? After all, the average price of a bag of potato chips hit $6.50 last fall--a nearly 50% jump since 2020. And it has still kept climbing, to $6.62 as of last month, per CPI data. It's going to take more than a 20% off coupon to get buyers excited about making that purchase again.  

Which is why Spillane is warning that price discounts will have to get deeper if companies want to attract shoppers back, or else they'll have to accept lower volume growth. Either way, it's a risk to profit margins. And when profits get squeezed, costs--like labor and marketing--also have to get cut.  

And this could play out in a broader way, warns Lazar. Outside of the "magnificent six" mega-cap stocks, corporate revenues are stalling out (up 2% in real terms from a year ago as of Q1), and remain below their pre-pandemic trend. "Weakening revenues and narrowing margins are forcing companies into layoffs, to protect profits," she wrote earlier this month.  

Dorito deflation might be welcome news to grocery shoppers, in other words, but it's not for investors, or the labor market. Pepsi shares are down 1% since January, and 15% from their peak last May. It's a similar story for Mondelez, which is down 5% since January. Their post-pandemic "reset" is still in the early stages, and that could spell trouble for the broader economy.   

See you at 1 p.m! 


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