By Jacob Sonenshine
Coca-Cola earnings came with a warning to companies across the market — raising prices is getting harder.
For companies like Coca-Cola, America’s inflation problem wasn’t much of a problem. The company had pricing power, which meant that it could continue raising prices to offset the higher costs throughout its ecosystem. Even though January’s consumer price index was stronger than expected, it showed that the rate of inflation is still falling — and that could eventually catch up with sales growth.
It may already have. Coca-Cola raised prices by about 9% in the fourth quarter of 2023, down from 13% increases in the fourth quarter of 2022, and sales growth for the quarter was even lower at 7% to $10.9 billion, down from a double-digit rate in during the same quarter in 2022, as the volume of goods sold wasn’t strong enough to offset the negative impact of a stronger dollar and higher prices.
PepsiCo faced similar problems. It lifted prices about 9% this past fourth quarter, versus 16% in the fourth quarter of 2022, but the price hikes weren’t enough to drive growth as sales slipped 0.5% to $27.85 billion.
Other sectors are in a similar boat. Electrical products manufacturer EnerSys lifted prices by 1% in the most recent fourth quarter, versus 8% in the prior fourth quarter. Chemical maker Air Products & Chemicals dropped prices by 10% versus a 10% increase in the fourth quarter of 2022.
If prices can’t do the heavy lifting for sales, volumes will need to make up the difference. So far they haven’t been able to, resulting in slower sales growth: Excluding financials, aggregate fourth-quarter sales growth for S&P 500 companies has been 3.9%, according to Wells Fargo, down from 6.3% in the fourth quarter of 2022.
The slowing sales growth hasn’t hit earnings yet, but it will need to keep up with total operating costs to prevent profit margins at S&P 500 companies, which have declined to 13.6% this quarter, versus close to 14% the previous year, from falling too much. Smaller margins and slowing sales would make earnings growth tougher, something that could be an issue for a stock market that trades at more than 20 times those earnings.
“Valuations are elevated and we really need earnings to come through this year to support those valuations,” says LPL Financial’s chief equity strategist Jeffrey Buchbinder.
Maintaining pricing power could make all the difference.