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Frito-Lay turned name brand chips into essentials
The PepsiCo business wasn't seeing trade-down to private label in 2022.
Throughout 2022, a common narrative emerged that consumers were opting for private label products over name brands as they sought to save money amid 40-year-high inflation.
While grocers from Walmart to Kroger reported a general shift toward their store brands throughout the year, the trend was not uniform across all CPGs.
In particular, some of the country’s most popular chips brands proved resilient in their ability to keep consumers reaching for more.
PepsiCo said its Frito-Lay business, which includes Doritos, Cheetos and Lay’s, delivered double-digit growth of 18% year-over-year in the fourth quarter of 2022, and 17% for the year. It also gained share in key categories during the year.
“The business continues to benefit from strong category trends as consumers navigate towards popular, trusted brands that offer value, convenience, and variety,” top executives wrote in prepared remarks ahead of the company’s most recent earnings call.
Even as inflation rose, there were signs throughout the year that consumers were opting for Frito Lay products as they sought savings. Frito Lay’s multipack became a poster child of the consumer desire to stock up on essentials when it became one of the top selling items during July’s Prime Day, per data from Numerator.
Frito Lay’s prime positioning wasn’t accidental. PepsiCo CEO Ramon Laguarta called the snack business the “jewel” of the company.
“We've put a lot of investments in the last couple of years and [Frito-Lay] continues to respond every year better to those investments,” Laguarta said, adding that the company invested in upping marketing spend, product innovation and clearing infrastructure bottlenecks.
The result is a business with 11% operating profit growth in 2023, which Laguarta called historically high.
“We feel like Frito had just an outstanding year,” said CFO Hugh Johnston. “We'd love to have a couple more like this one.”
What’s the lesson?
Make your brand essential. Frito-Lay sells chips and snacks, but the company’s growth indicates that consumers see it further up the pyramid. They're the types of brand that people seek out as a treat as they seek to feel better, similar to beauty products. This is a result not just of innovation, but brand recognition that has turned products into categories. When people see Doritos, they don’t think they’re buying cheesy tortilla chips. They simply think they are buying Doritos, and that makes them a staple. Instead of looking for other brands that are cheaper, people sought savings by stocking up on Prime Day.
There’s opportunity in a downturn. PepsiCo recognized that Frito-Lay had a big opportunity, and invested. It’s a time when many companies are pulling back due to the collision of inflation and a consumer downshift. But the parts of a business that are working can benefit from a boost, no matter what’s happening in the economy.
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Consumer sentiment dips to open March for the first time in 4 months
Inflation expectations fell to two-year lows, the University of Michigan reported.
After months of gains, consumer sentiment fell to start the month of March.
According to the University of Michigan’s preliminary data for March, sentiment fell for the first time in four months. Currently, it is 5% below February, but is 7% higher than the same month of 2022.
Driving the declines were lower sentiment among lower-income, less-educated, and younger consumers, as well as some of the highest stockholders.
Higher prices resulting from stubborn inflation continue to be a big drag on sentiment across all categories. While the collapse of Silicon Valley Bank and other financial institutions figures to play a role, most of the interviews for UM’s data collection were completed prior to the SVB turmoil.
(Source: University of Michigan)
Looking ahead, consumers do see improvement on the horizon for prices. Year-ahead inflation expectations fell from 4.1% in February to 3.8% in March. That’s the lowest reading since April 2021. Long-run expectations also fell to 2.8%, which was below the range of 2.9%-3.1% for only the second time in 201 months.
The takeaway: While these readings are still well above pre-pandemic levis, they will likely be welcome news among economists at the Federal Reserve as a signal that inflation is not becoming implanted in the consumer psyche. But with the introduction of a banking crisis and inflation remaining stubborn, the Fed’s path is not clear, and that will extend to consumers.
“With ongoing turbulence in the financial sector and uncertainty over the Fed’s possible policy response, inflation expectations are likely to be volatile in the months ahead,” wrote UM Survey of Consumers Director Joanne Hsu.