Food and drinks giants flag price pressure on low-income consumers

McDonald’s says poorer customers have been cutting back on fast food and cooking at home. Photo / Justin Sullivan, Getty Images

The world’s largest food and drinks companies have said that poorer consumers in the US are cutting their spending in the face of persistent price rises, in a sign that the lowest earners are bearing the brunt of sticky US inflation.

McDonald’s, Coca-Cola, Nestlé and PepsiCo have each flagged that many low-income consumers are no longer able to absorb price rises as they shift to cheaper options or cut back their consumption, even as better-off consumers keep up their spending.

“The consumer is certainly being very discriminate in how they spend their dollar,” said McDonald’s CFO Ian Borden, speaking to analysts following the company’s first-quarter results on Tuesday.

Thanks to the Biden administration’s stimulus checks during and after the pandemic, US consumers have remained remarkably resilient, with better-off consumers continuing to buy more premium goods. Brewer Molson Coors this week reported strong demand driven by pricier beers as more consumers treat themselves.

However in a sign of bifurcation, lower-income consumers are showing signs of real stress, said executives.

McDonald’s, whose customers skew towards lower-income brackets, said that poorer customers had been cutting back on fast food and cooking at home instead in the three months to December.

“While it may be more pronounced with the lower-income consumer, I think it’s important to recognise that all income cohorts are seeking value,” said Borden, adding that the company was focused on providing an “entry level meal bundle” with “compelling” price points for products that consumers knew well.

Although down from its highs of last year, US inflation rose unexpectedly in February and March, dampening hopes of interest rate cuts.

Coca-Cola reported strong demand overall in the US on Tuesday, raising its sales outlook on the back of an earnings beat, but CFO John Murphy said away-from-home sales (those made in restaurants, bars and other venues) in North America were slower than expected due to the pressure on low-income consumers.

“There is some purchasing power compression in the lower income echelons, and I think it’s quite clear that there’s some behavioural shift there looking for value,” said Murphy. He added that the company was looking at larger and more affordable packs for this consumer.

Some of the nation’s biggest banks say they also have seen growing economic pressure on lower-income consumers. Citigroup said that spending on retailers’ credit cards, like Home Depot, fell in the first quarter of the year, while spending on Citi’s own credit cards continued to rise.

“I call it the K-shaped economy,” chief executive Jane Fraser said on Tuesday at the bank’s annual meeting, referring to the divergence of lower and higher income consumers when it comes to spending.

Fraser said that while many consumers continue to spend, the bank is seeing growing delinquency rates and cautious behaviour especially among its lower income clients.

Nestlé slumps

Reporting its first-quarter earnings last week, Nestlé saw a 7.7 per cent slump in sales in the US as low income consumers cut back on the company’s frozen goods, which includes brands like DiGiorno pizza, Hot Pockets, and Stouffer’s ready meals.

Speaking to analysts, Nestlé CFO Anna Manz said the reduction of Snap benefits — the US’s food stamp programme for low income people — as well as the sustained period of price rises had led to a 50 per cent reduction in purchasing power.

She added however that because income levels were rising, “over the next few quarters, I think that financial pressure is going to ease”.

PepsiCo chief executive Ramon Laguarta similarly said lower income consumers were “stretched” and “strategising a lot to make their budgets get to the end of the month” following the company’s first-quarter results last week.

PepsiCo’s North American beverages division saw sales volumes fall 5 per cent in the first three months of the year.

Written by: Madeleine Speed and Stephen Gandel

© Financial Times