The combination of higher prices, lower quality and smaller packaging in recent years has made consumer stocks and their shareholders a lot of money.
However, if Fortune‘s recent reporting of events unfolding in Europe is any indication, these companies are about to receive some karma for their greediness.
Skimpflation is “a reduction in the quality and availability of a service [or product] while the price remains the same.” Shrinkflation, on the other hand, is “a reduction in the size of an item of packaged food, such as a chocolate bar, while the price remains the same.”
According to Fortune, Barclays reported that over half of British consumers surveyed last August found that “food, drink and household purchases were of a lower quality but with no price reduction.”
Furthermore, 76% of these consumers found “a reduction in the volume of product—or of key quality ingredients,” Fortune reported, suggesting that chocolates, cookies and other snack products were the worst offenders.
Here are three consumer stocks that have resorted to shrinkflation, and whether you should sell.
No company has received more bad publicity about its shrinkflation and skimflation tactics than PepsiCo (NASDAQ:PEP).
In early January, French grocery giant Carrefour (OTCMKTS:CRRFY), who had already started labeling PepsiCo’s various products using shrinkflation to keep margins high in the fall, accelerated the fight with the company. The company announced it would stop selling Pepsi products in its stores in France, Italy, Spain and Belgium.
In December, Abacus Data, an Ottawa-based research firm, reported that two-thirds of Canadians believe a Grocery Code of Conduct is a good idea. Further, 74% believe Canada’s corporate concentration of grocery stores—five major players—leads to higher grocery prices.
What they fail to understand is that it is companies like PepsiCo that are forcing the grocery retailer’s hands. They have no choice but to pass on these price increases.
In Q3 2023, PepsiCo increased prices 11%, its seventh straight quarter with double-digit price increases. To put that in perspective, a bottle of pop that costs $1 at the end of 2021 now costs approximately $2.08.
As I said in December about PepsiCo’s price increases, they’ve done little for its share price. I’d be very hesitant to buy PEP stock right now.
Post Holdings (POST)
Post Holdings (NYSE:POST), based in St. Louis, has recently had several acquisitions and spun off BellRing Brands (NYSE:BRBR) in 2019. Although its modern history dates from 2012, it started in 1897 with the introduction of Grape-Nuts cereal.
In 2008, Post Foods was spun off from Kraft. One of its ready-to-eat cereals is Honeycomb. In October 2023, the Canadian Broadcasting Company published an article about how Honeycomb’s box had gotten taller but slimmer, reducing package weight by 70 grams or 11.7%.
As far as consumers go, it’s easier to notice a price increase than a size reduction. I would expect as price increases come under fire, we will see more examples of shrinkflation in 2024 and beyond.
Post’s 2022 10-K states that all four operating segments had “higher average net selling prices” in its latest fiscal year. It blamed the price increases on inflation. Due to product mix affecting profit margins in the past year, it’s hard to know whether Post’s explanation for higher prices is legitimate.
Its shares did even worse over the past five years, up less than 40%, or half the S&P 500. With most of its valuation metrics lower than their five-year averages, it’s a much better value play than PepsiCo.
Texas-based Kimberly-Clark (NYSE:KMB) makes tissues under the Kleenex brand, Cottonelle toilet paper, Viva paper towels and many other products. In 2022, the company reduced the number of tissues in a box of Kleenex from 65 to 60, another sneaky example of shrinkflation.
In Q3 2023, the company’s sales were 2% higher, to $5.1 billion. Its gross margins increased by 530 basis points from Q3 2022 to 35.8%. As a result, its adjusted earnings per share rose 24% year-over-year.
Its press release said gross margins were higher due to “favorable net revenue realization and productivity.”
Like every other company, volumes were down between 1% and 8% depending on the geographic region, yet prices were up from 4% to 11%, netting it a significant profit increase. Combining fewer products (five fewer tissues per box) with higher prices makes it easy to see how EPS increased by 24%.
Kimberly-Clark stopped selling Kleenex tissues in Canada this past August. The company couldn’t make enough money on the product, even with fewer tissues per box. The problem is that the company doesn’t have enough manufacturing capacity in Canada, so it is forced to ship the product from the U.S. Shipping by truck is very expensive for tissues and other light items.
It might be making money hand-over-fist due to shrinkflation and higher prices, but that hasn’t helped its share price, which has risen 6% over the past five years.
I wouldn’t buy its stock unless you’re an income investor because the capital gains are meager.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.