Is PepsiCo still driving inflation?

It’s been a topsy-turvy earnings season so far, with big tech firms focusing on cutting costs to a more proportionate level. Some company earnings have been well-received, while others have seen a negative response. The unglamorous PepsiCo is up this week, and they’ve been raising prices hand over fist…

PepsiCo was a focus in the prior earnings season, when we asked if it would be Pricing Power or PepsiCope? The chart setup was similar then (circled). Falling below the 200 day moving average heading into the report, and into a sequence of higher lows (marked by the lower trendline). The report was well received. The stock gapped higher, rallying approximately 15% to a peak around two months later.

Is history set to repeat?

The company has been raising prices. Although sales volumes are moderately lower, the price hikes are more than offsetting rising costs and lower volumes so far. In a joint statement after the October report, the management team explained:

“We are very pleased with our results for the third quarter as our business delivered 16 percent organic revenue growth and 14 percent core constant currency earnings per share growth.”

“Given the strength of our business momentum and results, we now expect our full-year 2022 organic revenue to increase 12 percent (previously 10 percent) and our core constant currency earnings per share to increase 10 percent (previously 8 percent).”

So, one of the key questions will be if this trend is continuing. Rising prices without significantly affecting volumes is seen as an indication of pricing power.

Rivals Nestle still plan to push pricing further this year according to CEO Mark Schneider. Not at the same pace but "we have some catching up to do over the full year".

Mcdonald’s CEO Chris Kempczinski pointed out the key factor:

“The consumer, whether it’s in Europe or the U.S., is actually holding up better than what we would have probably expected. There is going to continue to be inflation.”

The market usually uncovers narrative inconsistencies. How can there simultaneously be a ‘cost of living crisis’ while branded food and drink companies are raising prices with limited consumer pushback?

Simply, changes in the cost of living affect different income groups in different ways. Those least able to afford it are usually the ones hardest hit. However, these aren’t necessarily the same income groups that regularly buy branded products.

For want of a better term, the ‘middle class’ is doing just fine. Or at least they have been. However, inflation is starting to moderate, as is wage growth:

US credit card debt is also at record highs. According to the latest report from TransUnion, credit card balances hit $930 billion at the end of 2022, up from $785 billion in 2021. Delinquencies are ticking a little higher too, albeit from very depressed levels..

If consumer staples such as PepsiCo are to keep pushing price, enduring consumer health is going to be a key part of the picture. Will markets back the continuation of this trend or will the sequence of higher lows fail?

On the topic of pricing power, reports are hitting the wires that sales of Apple’s iPhone 14 models are slow in China, with authorised retailers slashing prices by the equivalent of $118 to stoke demand.

Pricing power is never guaranteed.