Affected by the underperformance of its Frito snack division, PepsiCo's Q3 revenue and profits both declined, leading to a downward revision of its full-year sales growth guidance.

The latest financial report shows that PepsiCo's Q3 revenue decreased by 0.6% year-on-year to $23.32 billion, falling short of the market's expected $23.76 billion, marking its poorest performance in four years; net income attributable to common shareholders also declined by 5.18% to $2.93 billion year-on-year, also missing expectations; adjusted earnings per share increased by 5% year-on-year to $2.31, surpassing the market's expected $2.29.

Faced with the bleak situation of both revenue and profits declining, the company explained during the earnings call that this was mainly due to the decrease in consumer spending and the impact of geopolitical tensions.

PepsiCo CEO Ramon Laguarta stated:

"The performance of certain categories in North America has been weak due to the impact of the Quaker North America product recall, and there have been disruptions in certain international markets due to geopolitical tensions."

Furthermore, PepsiCo has also lowered its annual sales growth guidance for the 2024 fiscal year, expecting organic revenue to grow by 1-3% for the full year, lower than the previous 4% target.

Is the weakest performance in four years the cost of aggressive price hikes?

A large part of Pepsi's weak performance is due to overpricing.

According to the data from the Federal Reserve Bank of St. Louis and TD Cowen, since 2020, the prices of Pepsi's salty snacks, carbonated drinks, and sports drinks have increased by an average of 41%; over the past five years, potato chip prices in U.S. convenience stores have increased by an average of 47%, and the price of a 12-pack of soda has increased by 66%.

A analysis by market research firm Upside this year found that due to cost concerns, consumers are reducing their trips to convenience stores and buying fewer commodities.

TD Cowen analyst Robert Moskow pointed out that Pepsi may have to reverse its loss situation by offering more discounts in the future.

Moskow cited an example, although Frito-Lay's sales in Q3 declined by 1.5% year-on-year, price reductions on products in that period helped increase sales.

But these measures are apparently not enough. Moskow pointed out:

"We believe that this staggered strategy to boost sales is not wide enough (possibly accounting for only 18-21% of total sales at a time), insufficient to substantially improve the sales trend of the entire business."

Moskow predicts that Frito-Lay will expand its range of discounted brands in the 2025 fiscal year, bringing in a moderate growth of up to 2%.

Food and grocery prices are gradually becoming a consumer 'pain point'.

Pepsi's price increase is not an isolated case. Along with the continuous rise in inflation in the United States after the pandemic, price hikes have been squeezing consumers' wallets.

Although in recent months, US inflation has shown signs of slowing down, relevant data shows that the annual inflation rate of US food and groceries has significantly slowed down since reaching a peak of 13.5% in August 2022.

However, some economists believe that the negative impacts of previous price increases will continue for several years.

Economist Paul Shea from Bates College in Maine pointed out that although there has been a decrease in the inflation of food and grocery prices, due to consumers' habit of expecting stability in this category's prices, the actual perception of inflation is 'disconnected' from the professional interpretation of economists. Against the background of a rise in absolute prices (the actual amount consumers pay when purchasing) of food and groceries, the impact will persist for a longer period.

Moreover, given that prices in sectors such as housing, autos, and medical insurance in the USA have already begun to outpace the average wage growth of workers, the price increase in groceries may bring additional pressure on the wallets of American consumers, exacerbating resistance sentiment.

Director of the Arkansas Economic Research Center and economist Jeremy Horpedahl pointed out:

"Although this is only a small part of people's consumption expenditure, the impression left will be profound - when they see these high prices, they will continue to be shocked."