Friday 2 June 2023

GREEDFLATION: McDonald’s, PepsiCo raising prices beyond inflation to generate bigger profits

 Food giants McDonald’s and PepsiCo continue to greedily raise prices, forcing many consumers looking for price breaks to keep waiting for the day when food prices normalize.

These price increases are ongoing. Many companies do not plan to change course and will continue increasing prices or keeping them at elevated levels even as some executives are warning that shoppers may become reluctant to spend at outlets that do not stabilize their prices. 

PepsiCo, the New York-based food giant that owns everything from Cheetos and Mountain Dew to Lays and, of course, Pepsi, reported a revenue increase of more than 10 percent to $17.85 billion for the fiscal quarter that ended on March 25. The company now expects organic revenue growth to grow by eight percent for the year, compared with its previous forecast of six percent.

Much of this massive profit increase comes from the fact that PepsiCo increased prices for its products across the board by an inflation-busting average of 16 percent during the first three months of the year.

McDonald’s, meanwhile, reported $5.9 billion in sales for the first three months of the year, exceeding expectations and increasing quarterly revenues by four percent from a year earlier and eight percent when accounting for the effects of currency fluctuations. Its net income for the first three months was $1.8 billion, up 63 percent from a year earlier.

Like PepsiCo, McDonald’s higher prices helped boost its sales. A Big Mac in the fast food joint now costs as much as $5.31, up from $4.33 in 2012.

This is despite McDonald’s CEO Chris Kempczinski’s warning that more and more customers are buying fewer items per order or refusing to add items to their meals for discounts.

“We are seeing in some places resistance to pricing, more resistance than we saw at the outset,” admitted Kempczinski during a recent investor call.

PepsiCo is experiencing a similar phenomenon, with Chief Financial Officer Hugh Johnston reporting seeing “a little bit of trade-down,” as consumers switch from purchasing single-serve soda cans to two-liter bottles, or moving from purchasing PepsiCo products at high-end grocery stores to cheaper stores.

“Greedflation” may compel Fed to keep raising interest rates

Economists have warned that this strategy of cushioning corporate profits with massive price increases may be contributing to the very pressures the Federal Reserve is using to justify raising interest rates.

Without any change, these economists believe policymakers at the Fed may keep raising interest rates or at least not lower them, increasing the likelihood and severity of an economic downturn.

“Companies are not just maintaining margins, not just passing on cost increases, they have used it as a cover to expand margins,” warned Albert Edwards, a global strategist at French multinational bank and financial services company Societe Generale. “Inflation is going to stay much higher than it needs to be, because companies are being greedy.”

This greed is already affecting other corporations, as the relentless pace of price increases is weakening consumers’ endurance. Telecommunications giant AT&T recently warned that the mass layoffs and corporate cost-cuttings is denting demand for wireless plans, with more and more customers preferring to stick with their old phones for longer than average. Its rival, Verizon Communications, has posted lower revenues as it lost wireless subscribers.

Market data from the Department of Commerce shows that Americans are already cutting their retail spending as they pull back on purchases of higher-cost items.

The top 20 percent of households by income in the United States typically account for about 40 percent of total consumer spending. Their overall spending on recreational experiences and other luxuries appears to have peaked.

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