Standoff in aisle four.
Shoppers are no longer willing to swallow high prices for brand-name potato chips, and salty snack makers are loath to roll back the highly profitable price increases of recent years.
The result? Flatlining sales for top potato-chip brands as many buyers turn to cheaper generic options. Unit sales of potato chips were almost completely flat for the 52 weeks ending on June 28, versus the prior year. In dollar terms, sales numbers were up just over 3% — as higher prices offset the lack of growth in turnover. But that was a sharp slowdown from the previous year, when dollar sales were up almost 14% versus the prior year, according to data provided market research firm Nielsen.
If there is a bright spot in the potato-chip world, it's in the generic, or private-label, business, which has been gaining market share both in terms of sales and volumes, BofA analysts wrote in a note last month.
The potato chip buyers’ strike is deep-fried microcosm of this moment in the U.S. economy, as consumers, especially people who make less money, have grown increasingly price conscious and shifted their behavior after years of uncomfortably high price increases. Retailers and restaurant chains have reacted relatively quickly, with giants like McDonald’s, Walmart and Target all recently spotlighting a renewed focus on lowering price points.
Now, packaged food companies might be forced to take similar steps.
Prices for a 16-ounce bag of chips are up 30.6% since the end of 2020, outpacing the 20.6% increase in the consumer price index. Given that price increases for potato chips have typically been between 1%-2% a year, that’s roughly a decade to 15 years worth of price increases in around three years.
Shoppers, by and large, didn’t balk until recently. In part, analysts say, that was the result of an increase in federal spending on food support, which buttressed food spending. In 2021, the Biden administration negotiated the largest-ever increase in benefits for the Supplemental Nutrition Assistance Program, a program formerly known as food stamps.
However, those benefits began to be pared back to pre-pandemic levels in early 2023, resulting in a sales slump that has put pressure on the share prices of potato chip makers — such as Pepsico, which owns Ruffles-producer Frito Lay, Campbell’s, which makes Kettle Chips, and Pringles producer Kellanova.
So far, the companies have tried to reinvigorate demand with temporary price reductions, the type of promotions that have long been effective in nudging consumers to pick up a bag of chips. But so far, says Peter Galbo, an analyst who covers packaged food companies for BofA Securities, there’s been surprisingly little response from shoppers, suggesting prices may still be too high, and companies could be forced to cut prices back further and perhaps permanently.
"That's the conundrum for these companies,” said Peter Galbo, an analyst who covers packaged food companies for BofA Securities. “It's either, do what you've been doing — which isn't working, do nothing — which isn't a strategy, or lower prices and destroy economic profit.”
Analysts like Galbo will be keeping a close eye on what these companies say about pricing over the coming weeks — and how markets react — as they report earnings results and offer guidance about the coming year. Pepsi, which makes lots of salty snacks, is due to report numbers Thursday morning.
