Any price gouging with that? Junk giants’ junk pricing threaten sales slip

While in Australia we continue to debate whether price gouging even exists, two of America’s biggest consumer junk food companies got a rude awakening from consumers over the issue in the closing months of 2023.

In its most recent quarterly report and update, burger giant McDonald’s was forced to admit that its target audience, people earning US$45,000 (A$67,000) or less, had cut back their spending and were eating more at home to save money. 

“We certainly know consumers are more wary or weary of pricing,” McDonald’s CFO Ian Borden told investors on the company’s earnings call on February 5. The company’s CEO Chris Kempczinski said that people actually visiting McDonald’s stores had been placing smaller orders too, especially low-income customers.

This comes after the company engaged in price gouging in the past two years: McDonald’s prices went up by around 10% in the US in 2023 and it raised prices by a similar amount in 2022. That’s a lot more than US inflation, which peaked at 9.1% in June 2022 and fell to 3.4% at the end of 2023.

McDonald’s had said at its previous earnings call in October that its price increases largely hadn’t put customers off. That’s evidently now changed, though global sales increased in the fourth quarter worldwide by 3.4% (with one exception).

On Friday, Pepsi had a similar story, but unlike McDonald’s, Pepsi saw sales slide. Pepsi’s fourth-quarter revenue fell 0.5% to US$27.85 billion, the first drop in 14 quarters. Analysts had expected a 1.4% rise. PepsiCo has been consistently raising its prices in recent years, blaming inflationary pressures, but really it’s been about raising revenue: there were three upward revisions to its revenue forecasts in 2023, each following a price hike.

In its core business, the United States, it was a miserable quarter: Pepsi’s North American beverage unit saw its volume fall 6% in the quarter. In fact, that was the second quarter in a row that soda sales volumes have fallen 6%.

Its North American Quaker Foods division reported an 8% decline in volume and Frito-Lay North America, which includes brands like Cheetos and Doritos, posted a 2% drop in volume.

“We are seeing a bit of a slowdown in the US,” CEO Ramon Laguarta told analysts on Friday’s earnings call. Both food and beverages slowed in the fourth quarter, he said, in part due to pricing and tightening household budgets.

In Europe, where the issue of profiteering and price gouging is taken a lot more seriously by both central bankers and policymakers than in Australia, PepsiCo’s fondness for gouging has incurred the wrath of Carrefour, Europe’s largest food retailer. In January, it announced it would not be stocking PepsiCo’s brands “due to unacceptable price increases”. The ban applies to stores in France, Italy, Spain and Belgium.

Carrefour has more than 12,000 stores worldwide and has been very active in negotiating prices with food giants. Last year, the chain started a “shrinkflation” campaign against products from companies such as PepsiCo, Nestlé, Unilever and Lindt & Sprüngli (Lindt chocolates) that had shrunk in size but cost more. From January 4, banners were placed in aisles for PepsiCo products such as Lay’s, Doritos, 7UP drinks and Lipton tea, advising customers: “We are no longer selling this brand due to unacceptable price increases.”

France was also the only Western country where McDonald’s sales went backwards: along with Starbucks, it is the target of a boycott by Palestinian supporters after McDonald’s stores in Israel began handing out free food to Israeli Defence Force members. Sales also fell in countries like Indonesia and Malaysia.

None of this stopped both PepsiCo and McDonald’s management teams from handing investors a reward for their greed: McDonald’s lifted its dividend by 10% (nearly three times the US inflation rate) and Pepsi upped its by 7% (nearly twice).