The tide could be turning on consumers’ willingness to pay higher prices, Coca-Cola CEO James Quincey warned Thursday.
Consumer goods companies have been steadily hiking prices as their own production costs rise, and so far, shoppers seem to be accepting the increases. Executives at McDonald’s (MCD), Chipotle (CMG) and elsewhere have recently said that higher prices have not chased customers away — in fact, sales grew as prices went up.
But that could soon change, Quincey said during an analyst call Thursday.
So far, businesses have been able to comfortably raise prices because of special circumstances, Quincey said. Customers have been better able to afford the increases because the government pumped stimulus money into the economy during the pandemic. And consumers are less likely to blink at price increases on individual items when costs are going up across the board.
But those circumstances are temporary.
“Eventually, it moves to another phase where there’s inflation and a squeeze on the income,” Quincey said. “It’s easier to do pricing in a stimulus environment where everyone else is going up. It’s much harder when there’s a real squeeze on income.”
And that phase is already here.
Americans can expect far less federal aid in 2022 compared to the early days of the pandemic — just as inflation is hitting record highs. The consumer price index, a key measure of inflation, rose 7.5% in the year ending in January, not adjusted for seasonal swings. That’s the highest annual price increase since February 1982, and a steeper hike than economists expected. And although wages are rising, most increases are modest when taking into account higher prices. For some workers, real wages fell over the past two years due to inflation.
Still, Quincey’s comments don’t mean that Coca-Cola (KO) is shying away from price increases. The company raised prices last year, and may do so again this year if needed.
Rival PepsiCo (PEP), which also held an analyst call Thursday, is treading lightly when it comes to price hikes as well.
“We’ve built multiple scenarios around elasticity,” CFO Hugh Johnston said during the call. Price elasticity refers to how demand is affected when prices change. “We have plans to react to any of them … we’re going to have to be very agile this year in the way that we plan.”
But price hikes are coming from PepsiCo. “It’s going to be a pretty healthy pricing year to accommodate the cost increases,” Johnston said.