“Consumers are willing to pay for brands and trademarks that have high net worth,” Gerald Pascarelli, senior vice president of equity research at investment firm Wedbush Securities Inc., told me.
I asked Pascarelli about current consumer buying habits shown in third-quarter earnings reports from major brands like Coca-Cola. And Nick Setyan, general manager of Wedbush covering the restaurant sector, shared some information about Chipotle. Despite historic inflation, many are willing to absorb the price hikes for a coke and a bowl of burrito.
“Soft drink companies will continue to set prices until there is a significant impact on the elasticity of demand,” Pascarelli said. For all soda companies, rate increases are currently a component of the strong price mix, he says. The other component is the price pack architecture. “Offering smaller packaging protects the consumer in terms of absolute costs, but it also results in a positive mix shift for manufacturers, which is another element of pricing,” he said.
In the third quarter, The Coca-Cola Company’s (NYSE: KO) price mix increased 12% from the same period last year, Pascarelli said. The beverage giant announced Tuesday that net revenue rose 10% to $11.1 billion in the quarter. It exceeded expectations by $10.52 billion. Product volume also increased by 4%. KO is also introducing packages at lower prices.
“All businesses face continued high levels of commodity price inflation,” says Pascarelli. “And while they’re still looking to gain efficiencies and streamline their cost structure, the best compensation has been taking outrageous prices.” This has resulted in “greater revenue growth than algorithms, which helps protect profitability,” he says.
Coffee and soft drink company Keurig Dr Pepper Inc. (Nasdaq: KDP) reported third quarter results today. KDP announced on Monday that Sudhanshu Priyadarshi had been appointed as the new chief financial officer, effective November 14. This follows the promotion of former CFO Ozan Dokmecioglu to CEO in July. Priyadarshi was most recently Chief Financial Officer at Vista Outdoor Inc., a sporting and outdoor goods company. He began his career at PepsiCo, where he spent 14 years in roles including CFO of Global R&D and PepsiCo’s Global Nutrition Platforms.
Priyadarshi’s initial priorities will likely focus on achieving long-term goals to deliver mid-single-digit revenue growth and high-single-digit EPS growth, Pascarelli said. To do this, implementing the necessary pricing as compensation will be key, he says. Another key focus will be monitoring and integrating any potential M&A deals to scale the business inorganically, he says.
Looking at the restaurant industry, Chipotle Mexican Restaurant, Inc.’s third-quarter sales increased 14% year-over-year to $2.2 billion, mock-up sales having increased by 7.6%. In August, Chipotle raised prices for the third time in 15 months, pushing them up 13% from the third quarter of last year. And, in early October, “there was a price increase at about 700 restaurants to address pockets of outsized wage inflation,” Chief Financial Officer Jack Hartung said during the earnings call on Tuesday. At each restaurant, menu prices increased between 2% and 3%, which overall had an impact of about 0.5% on the entire business, Hartung said.
During the quarter, cost of sales was 29.8%, down approximately 50 basis points from a year ago. The company expects the cost of sales to remain roughly the same in the next quarter. However, in the fourth quarter, price increases could approach 15% year-over-year, before falling to 11% in the first quarter of next year, Hartung said.
But as Chipotle continues to raise prices, will key drivers of sustained growth like loyalty and menu innovation be compromised? “Management will need to be more careful and thoughtful about what pricing levers they can pull,” Setyan says.
“For example, part of the incremental pricing in Q4 versus Q3 is a change in the loyalty rewards structure (more points needed for free items),” he says. And the current limited-time offer (LTO) is beef, which is priced “significantly above” regular menu offerings, Setyan says. “That may explain the relative lack of success (compared to chest at this time last year),” he says. “The next one should be more palatable because it’s an LTO chicken.”
However, Chipotle isn’t alone in seeing price increases, Setyan says. “[McDonald’s] menu price increases are in the range of 10-12%,” he says. “The price increases in groceries are even bigger. So we’re seeing pressure on low-income consumers across the industry,” Setyan says. Chipotle defines lower income as household income below $75,000; about 40% of customers, he says.
Price increases are helping to increase revenue for big brands. But ultimately, the ball is in the consumer’s court.
A report by First Insight in partnership with WWD, a property of Fairchild Fashion Media, measures consumer confidence. Sixty-two percent of consumers surveyed believe the United States is currently in a recession, according to the report. Consumers cited grocery prices, gasoline prices and the high cost of restaurant meals as their top three inflation issues. The consumer research is based on a survey of over 1,000 respondents in September 2022.
Courtesy of First Insight and WWD
The latest edition of the International Energy Agency’s (IEA) “World Energy Outlook” warns that “the world is in the midst of its first global energy crisis – a shock of unprecedented scale and complexity” , triggered by Russia’s invasion of Ukraine. The cost of spot purchases of natural gas has reached levels “not seen before, regularly exceeding the equivalent of $250 per barrel of oil”, according to the report. “The crisis has fueled inflationary pressures and created a looming risk of recession, as well as a massive $2 trillion windfall for fossil fuel producers above their 2021 net income,” the IEA said. .
Celeste Melletchief financial officer of Evercore (NYSE:EVR), an investment banking advisory firm, will leave to work for “a large private and international alternative asset fund manager.” Evercore CEO John Weinberg said in a statement. Global Infrastructure Partners has hired Mellet as partner and chief financial officer, according to a Bloomberg report. Evercore will begin a formal search process for its next chief financial officer. Mellet, who began his role in July 2021, will remain and work with the Evercore team until February to support a transition. Prior to joining Evercore, she was EVP and CFO at Fannie Mae. Mellet also worked at Morgan Stanley for 18 years in various roles, including that of global treasurer.
Jason Cole was named chief financial officer of Desktop Metal, Inc. (NYSE: DM), an additive manufacturing technology company, effective November 10. Cole, 47, joins the company after 18 years at Analog Devices. Most recently, he served as Chief Financial Officer of the Global Operations and Technology Division, a position he has held since January 2018. Cole began his career at Arthur Andersen LLP in the practice of high technology auditing from 1997 to 2001.
“Generally, when you get into an economic scenario like this, where inflation is priced in, it’s very difficult to get out of it without a real economic downturn.”
– Goldman Sachs CEO David Solomon told Saudi Arabia’s Future Investment Initiative conference on Tuesday that the United States would “likely” experience a recession, as reported Fortune.