What pricing from consumer brands says about the state of consumer spending

Three key brands are telling investors a great deal about consumer spending with sales continuing to grow.

Video transcript

- Let's get you up to speed now on the state of the consumer. As far as companies like Pepsi, Unilever, and Kellogg are concerned, consumers in the US are doing just fine. As businesses raise prices to combat high commodity costs, the average shopper is eating those price hikes literally. Pepsi's CFO Hugh Johnston saying on Yahoo Finance this morning that the giant has zero intentions in cutting prices despite the fact that Johnston thinks we could see a recession later this year. Listen.

HUGH JOHNSTON: We have no intention of cutting prices. That's certainly not part of the year. Frankly, we're coming out of 2022, which was just an outstanding year. I mean, 14% revenue growth. Strong EPS. Obviously, the company is just firing on all cylinders, competing very effectively. We've got good momentum coming into the year. But we're also well aware of the fact that in a high interest rate environment it could start to drag on consumer spending at some point.

- But it's not. And really, when you look at the theme that emerged, we kind of just hinted to it, alluded to it, Seana. You've got these big companies-- Unilever, Pepsi, and Kellogg. And, really, one theme emerged. Volume was down, demand was slightly down, but price hikes made up for it. And they have no intention of lowering those prices.

- Yeah. But you got to ask how long that can continue for because even where we are today is a little bit different than where we are in the fourth quarter of last year. And I think we're starting to see consumers continue to pull back on spending. You don't have to look any further than the recent retail sales reports to show you that. So, yes, they do have the power. But I think it's also going to be a very brand-specific story, right.

Pepsi, maybe they do have the ability to raise prices even higher from here. They're saying they're not going to. But maybe they would. But it probably wouldn't really hurt margins too much. Unilever saying that they likely will raise prices in the future. And remember that this is coming after the company has raised prices for the eighth consecutive acceleration in prices that we have seen in the quarter for Unilever. They are up about 13% right now. And they're saying that prices could be headed even higher because they've only passed on about 3/4 of the higher cost to their consumer.

And then comparing the demand there to what we saw from Chipotle where Chipotle doesn't really have any room to raise prices any higher because of that falling demand. So I think some brands still have that pricing power. They're going to have the ability to raise prices even higher in this current quarter, maybe into the second half of the year to continue to offset inflation in their business. But I don't think that's true across the board.

- Yeah. Chipotle is a great point because visits were down 10% in the quarter. And they saw the drop off among those that make $75,000 or less per year. They found that they clearly hit the ceiling in terms of how they can raise their prices. But, again, they're not lowering those prices and didn't mention any plans to do so. And to your point, wow, that Unilever number with 13%. But that cut volume by 3.6% worldwide.

I can't help but wonder what's the Fed story here. How's our boy JP, Jerome Powell, seeing all this because there's no deflationary story here. They're going to keep these prices high. And I can't help but wonder if he sees these numbers and says, whoa, we've got a lot more to do before we can get anywhere near that target of 2%, let alone something closer to 4%.

- Yeah. Certainly. I think there clearly is a lot more work to be done. That's kind of what we heard from a number of Fed officials, even this week, in addition to Powell. A number of Fed officials coming out saying that higher rates are likely, that they probably will be necessary given that environment right now, higher prices, and then not even to mention that jobs report number that we got last week of 517,000.

- Massive 517 spot. Yeah.