Despite drop in cost, companies continue to raise prices on consumers

Some companies and restaurants have continued to raise prices on consumers even after their own inflation-related costs have been covered

A year ago, a bag of potato chips at the grocery store cost an average of $5.05. These days, that bag costs $6.05. A dozen eggs that could have been picked up for $1.83 now average $2.90. A two-liter bottle of soda that cost $1.78 will now set you back $2.17.

Something else is also much higher: corporate profits.

In mid-October, PepsiCo, whose prices for its drinks and chips were up 17 percent in the latest quarter from year-earlier levels, reported that its third-quarter profit grew more than 20 percent. Likewise, Coca-Cola reported profit up 14 percent from a year earlier, thanks in large part to price increases.

Restaurants keep getting more expensive, too. Chipotle Mexican Grill, which said prices by the end of the year would be nearly 15 percent higher than a year earlier, reported $257.1 million in profit in the latest quarter, up nearly 26 percent from a year earlier.

Although food companies are prominent examples of how rapid inflation is being passed from producers to consumers, the trend is evident across a wide variety of industries. Executives from banks, airlines, hotels, consumer goods companies and other firms have said they are finding that customers have money to spend and can tolerate higher prices.

And this makes it harder for the Federal Reserve to achieve its goal of bringing down inflation by aggressively increasing interest rates. Fed officials are set to announce their latest rate decision on Wednesday afternoon.

For years, food companies and restaurants generally raised prices in small steps, worried that big increases would frighten consumers and send them looking for cheaper options. But over the last year, as wages increased and the cost of the raw ingredients used to make treats like cookies, chips, sodas and the materials to package them soared, food companies and restaurants started passing along those expenses to customers.

But amid growing concerns that the economy could be headed for a recession, some food companies and restaurants are continuing to raise prices even if their own inflation-driven costs have been covered. Critics say the moves are all about increasing profits, not covering expenses. Coca-Cola, PepsiCo and Chipotle did not respond to requests for comment.

“The recent earnings calls have only reinforced the familiar and unwelcome theme that corporations did not need to raise their prices so high on struggling families,” said Kyle Herrig, the president of Accountable.US, an advocacy organization. “The calls tell us corporations have used inflation, the pandemic and supply chain challenges as an excuse to exaggerate their own costs and then nickel and dime consumers.”

So far, food companies and restaurants have been able to raise prices because the majority of consumers, while annoyed that the trip to the grocery store or drive-through for takeout costs more than it did a year ago, have been willing to pay. But there are plenty of shoppers, including those with lower incomes or retirees on fixed budgets, who say the higher prices have led to changes in their routines.

Diane English, an 80-year-old partly retired artist who lives with her partner in Asheville, N.C., said she now shops at lower-price grocery stores like Aldi so she can afford her groceries. She also has stopped buying certain foods because they’re simply too expensive.

“I can’t remember the last time we had steak,” said Ms. English. A couple of weeks ago, she said, she looked at the meat department at the Fresh Market, a grocery store chain, and was dispirited at the high prices she found.

“We’re not going to do that,” she said. “We can’t.”

Over the last year, the price of food eaten at home has soared 13 percent, according to the Bureau of Labor Statistics, with some items spiking even higher. Cereals and bakery goods are up 16.2 percent from a year ago, closely followed by dairy, which has risen 15.9 percent.

The cost of eating at restaurants has risen 8.5 percent over the same period.

Even food executives have been surprised by how well the higher food prices have been accepted.

On a call with investors, James Quincey, Coca-Cola’s chief executive, said customers continued to buy the company’s products despite economic challenges.

“In the face of these pressures, consumers stayed resilient, and we continue to invest behind our loved brands to drive value in the marketplace and growth in our business,” Mr. Quincey said.

This summer, on a call with other Wall Street analysts, Jason English, an analyst at Goldman Sachs, noted that the food giant Conagra Brands had been able to price its products above inflation rates and recovered its profit margins.

Sean Connolly, the president and chief executive of Conagra, said that manufacturers saw their profits hit early by inflation and that maintaining robust profits was crucial to developing new products.

“We have to have healthy margins to be able to build out that innovation and get it to our customers in the market,” Mr. Connolly said on the call. Conagra did not respond to a request for comment for this article.

Likewise, investors and analysts are closely watching the continued price hikes at Chipotle, wondering when it will become too much for its customers. In late October, the company said its profit margin widened in the third quarter, since it was able to increase the prices it charges faster than its own costs rose. The company said its prices in the final three months of the year would be nearly 15 percent higher than they were a year earlier.

“The average entree was around $8 nationally two years ago, and they’ve maybe taken $1.50 in price in the past two years,” said Sharon Zackfia, group head of consumer research at William Blair & Company.

She added: “I am intrigued by what happens when commodities fall again, and how do restaurants offer more value to the consumer without lowering prices? In the long arc of history, most restaurants do not lower prices.”

Still, some cracks are emerging. Not all companies have increased profits. Profit at McDonald’s, for example, fell because of how the strong U.S. dollar has weakened other global currencies. High prices for deli meat, fresh fish and frozen dinners have led some shoppers to stop buying those products, according to data from Information Resources, a research firm.

Executives at Darden Restaurants said in September on a call with analysts that households with less than $50,000 in annual income were feeling the overall effects of inflation and eating less frequently at its Olive Garden and Cheddar’s restaurant chains. Rick Cardenas, the chief executive of Darden, said, “We are seeing softness with these consumers while conversely, we are seeing strength with guests in higher income households.”

Nicole Blaha, 53, who lives in Scottsdale, Ariz., started going to Walmart more frequently to stock up on things like granola bars and cereals to save money. She also uses an app called Ibotta to receive cash back on some of her purchases. It is one area of her life that has been affected by inflation where she feels she can make substantiative changes.

“I actually find it easier to kind of work with the groceries piece and try to save some money where I can,” Ms. Blaha said. “You can’t argue with the electric bill.”

In grocery stores, consumers began increasingly switching to less expensive store brands in March, executives at TreeHouse Foods, a company that makes cookies, crackers, pickles and beverages for retailers, told Wall Street analysts on a call in August.

Steve Oakland, the chief executive of TreeHouse, told analysts that “consumers are making changes to reduce their spending, which include embracing store brands and the value that they represent.”