The Journal. - Food Fight: PepsiCo vs. Carrefour

Episode Date: January 17, 2024

Carrefour, one of the world’s biggest grocery chains, said it’s dropping PepsiCo products from roughly 10,000 stores across five European countries. Carrefour says it’s taking a stand against high prices. But as WSJ’s Jennifer Maloney explains, PepsiCo has a different take on the story. Further Reading: - Supermarket Giant Drops Pepsi and Lay’s Over Price Increases  - PepsiCo, Grocery Giant Bicker Over Who Dumped Whom  Further Listening: - Are Rotisserie Chickens ‘Inflation-Proof’?  Learn more about your ad choices. Visit megaphone.fm/adchoices

Imagine yourself grocery shopping in Europe, in a city like Rome or Barcelona, or maybe Paris. You step through the doors of one of the country's biggest grocery store chains, Carrefour. You go past the well-stocked cheese aisle, the bottles of wine, the baguettes. But maybe you're craving something a little more American.

Maybe something with a nacho zest. Maybe some Doritos. These days, when you get to the chip aisle, you might not find Doritos. Or Cheetos. In fact, you might not find Doritos or Cheetos. In fact, you might have a hard time finding any of PepsiCo's products on Carrefour shelves. Instead, you will find a strange little note. They show the brand name of various products like Cheetos and Doritos.

That's our colleague Jennifer Maloney. And they had this message from the grocer that says, do you want to read it to you in French and then tell you what it says in English? Yes, actually. Do you speak French? I do. Oh my God. Perfect. It has the Doritos logo on it. And underneath it, it says, It means, we are no longer selling this brand because of unacceptable price increases.

Huh. How often do you see something like that in a grocery store? I have never seen something like that in a grocery store? I have never seen something like that in a grocery store. To have a sign basically attacking your supplier, these little signs on the store shelves, they're like, I spit in your eye. It's like a food fight. It's a food fight.

Welcome to The Journal, our show about money, business, and power. I'm Ryan Knudsen. It's Wednesday, January 17th. Coming up on the show, two global food giants duke it out over prices. fresh lemons. The perfect balance of sweet and sour with a crisp, zesty edge. Welcome to The Garage, the place of refreshing hard lemonade. Available at the LCBO. Must be legal drinking age. Please enjoy responsibly. There are two heavyweights in this fight. In one corner, there's Carrefour. Carrefour is one of the world's biggest supermarket chains. It operates thousands of stores across more than 30 countries.

It's based in France, and it has a lot of stores across Europe, including countries like Italy and Spain and Belgium and elsewhere. And in the other corner, there's PepsiCo, the huge American multinational that makes way more than just its namesake product, Pepsi Soda. Doritos! Dinner doesn't have to be dramatic with Rice-A-Roni. Quaker cereal, fuel for any morning. Take a Cheetos break with Cheetos.

Savor a hummus! Woo! The fight that's playing out now has to do with something that began a few years ago, when inflation was shooting up around the world and started hitting the food industry. Think about the supply chain nightmares that we saw both during the peak of the pandemic, but also that continued for a couple of years after the pandemic hit. So the costs of transportation were higher, labor, and also the ingredients that go into all of these packaged foods. For companies like PepsiCo, which make a lot of processed food, inflation meant that their costs were rising. In response to its higher costs, PepsiCo started raising prices.

In response to its higher costs, PepsiCo started raising prices. In quarter after quarter, PepsiCo would talk about how it raised its prices. First, it was 12% higher than the year before. Then 13%. Then 17%. But the higher prices didn't seem to stop consumers from buying PepsiCo products. And PepsiCo was actually pleasantly surprised by the consumer response to these really steep price hikes because they expected that some consumers would trade down to cheaper versions,

you know, like no-name brands, for example. And a lot of customers stuck with them. Despite the price hikes, kept buying those Doritos and Cheetos and Lays. As PepsiCo's prices kept going up, so did the company's revenue. We also have PepsiCo to talk about. The company not showing signs of fizzing out after the beverage giant reported net sales had climbed 10.2% in the first quarter. PepsiCo reporting earnings of $2.25 a share. That was $0.10 above expectations. Revenue of $23.45 billion was just ahead.

Why were consumers still buying the company's products even when prices were going up? One phrase that I hear over and over from PepsiCo executives is the phrase, affordable luxuries. Our products are an affordable luxury. Our consumers, they may be cutting back in other areas that they're spending, but they see our brands as affordable luxuries that they can enjoy.

An affordable luxury? What does that even mean? It meant that they were sort of inflation-proof to an extent. If you're cutting back on the big stuff, like a new TV or concert tickets, you might still be willing to shell out a little extra for a salty snack. We've seen, I think, affordable treats and small moments of pleasure continue to be a key, you know, need state, I think. They still want affordable treats in their lives.

Consumers still want to have these small, simple, affordable treats and luxuries in their lives. Look, if you think about Cheetos or Doritos, it's not an essential. You know, you don't need it to survive. I mean, middle school Ryan needed it to survive, but yeah. Right? So they were saying, our costs are going up, so we have to pass along those costs by raising our prices.

Yeah, they said, we're passing along the price increases, and the shoppers are by and large coming with us. PepsiCo's higher prices have helped the company earn more revenue than ever before. But the company's profit margins are down. PepsiCo says the price increases haven't made up for the increased cost of labor, transportation, and ingredients. And PepsiCo isn't the only company raising its prices. Lots of food suppliers are. And the result is that food prices have gone through the roof, especially in Europe.

Figures from the British Retail Consortium show food prices hitting a high not seen since records began in 2005. France prides itself on taking its food seriously, but many consumers are now spending less or cutting quality because of high inflation. In France, where Carrefour is based, the French government decided to step in.

Last summer, the government convened a meeting of dozens of retailers and food manufacturers. And they basically, like, knocked the heads together and said, you all have to bring prices down, figure it out. The French finance minister did this. And he later complained that many of the companies that he had brought to the table had declined to cooperate. And he actually called out PepsiCo as one of those companies. And the French finance minister gave the companies a strict deadline. going to force the food companies and the retailers to start their annual contract negotiations months earlier than they normally would with the aim of implementing price decreases by January

this month. And in that environment of public attention and sort of this political drama playing out, Carrefour starts making shots across the bow and publicly attacking its suppliers. Back in the summer, in August, Carrefour started making public statements about how the suppliers were refusing to bring prices down. And Carrefour then kept escalating. By September, Carrefour was attaching warning labels to some products. They accused certain food producers of shrinkflation,

the practice of putting less of a product into a box but keeping the price the same or even raising it. And then, this month... Carrefour really blows the top off. They put signs up in stores in several European countries, including France, Italy, Spain, Belgium and Poland.

And that gets the world's attention. One of the world's attention. One of the world's biggest supermarket chains is taking a stand against PepsiCo. Carrefour told French customers it will no longer sell PepsiCo products, including Pepsi, Lay's, Crisps and 7up. They are pulling some Pepsi and Lay's products from store shelves in 9000 stores across France, Italy, Spain, and Belgium. So Carrefour was like throwing down the gauntlet, basically saying like, we're kicking PepsiCo products out of this store completely.

That's what it looked like. After the break, PepsiCo CEO responds. at TD Insurance, we understand that your business is unique, so your business insurance should be too. Whether you're a shop owner, a pet groomer, a contractor, or a consultant, you can get customized coverage for your business. Contact a licensed TD Insurance advisor to learn more. On August 9th, don't miss the Borderlands movie starring this summer's biggest cast. Everybody buckle up. With Cate Blanchett, Kevin Hart, Jack Black, Ariana Greenblatt, and Jamie Lee Curtis. Wow, you never see that.

Borderlands. Carrefour had made a loud PR move with a loud message. We're standing up for shoppers against unacceptable prices. PepsiCo shot back, calling that story a mischaracterization. PepsiCo said that it, not Carrefour, had decided to stop supplying those products to Carrefour had decided to stop supplying those products to Carrefour because the two sides hadn't reached an agreement on a new contract. But why did PepsiCo say that they stopped supplying them? Like, what was the holdup on their end?

Our reporting shows that PepsiCo and Carrefour have been in negotiations on a new contract for about six months. And PepsiCo said that it informed Carrefour that if they didn't reach an agreement by the end of 2023, that it would stop supplying its stores. And that Carrefour was aware of this and that that is what happened. And that Carrefour was aware of this, and that that is what happened. Regardless of who broke up with whom, it's clear the two sides couldn't agree on how much PepsiCo's products should cost. Why would a grocery store chain like Carrefour care how much PepsiCo sets its prices for? Carrefour needs everything in its store to sell, right?

It doesn't want things on its shelves that don't sell. And they don't want shoppers going somewhere where they can get products for lower prices. The end price that the consumer pays is the result of this sort of complex negotiation that takes place between the manufacturer and the retailer. Those two parties come together and they hash it out. And remember that both of those companies need to make money on the deal, right? They both have businesses to run and they need to make profits for their shareholders. So the food manufacturer is trying to preserve its profit margins. The retailer needs to preserve its profit margins too. In a statement, PepsiCo said the company can't agree to deals that aren't profitable.

agree to deals that aren't profitable. This week, PepsiCo CEO Ramon LaGuarta sat down with Wall Street Journal editor-in-chief Emma Tucker. They were at a conference in Davos, and he talked about the situation with Carrefour. The fact that suppliers and customers get into commercial tensions is just a fact of life. In particular, in the European context, it's even tougher. I find the U.S. and the U.K., actually,

relationships much more win-win. LaGuardia said that PepsiCo's price increases were all about responding to inflation. We had to absorb tens of billions of inflation in our company in two years. So this is unusual. It's the first time we had to absorb tens of billions of inflation in our company in two years. So this is unusual. It's the first time we had to do that. We've done it with a lot of productivity in our business,

but also we had to be smart about taking pricing in a very consumer-centric way as we tend to do things. The five European markets where Carrefour will no longer carry PepsiCo products account for about 0.27% of PepsiCo's global revenue, according to one analyst. So in the grand scheme of things, it's not... I mean, in the grand scheme of things, that rounds down to zero. Not a ton, in other words. It's not zero.

I mean, we're talking about global revenue in the billions. So it's not nothing. It comes out to like hundreds of millions a year. Parisians probably can live without Cheetos, right? But this is a lot more than snacks and soda. So they really do need to work it out. 0.27% of PepsiCo's global revenue might sound like a small number,

but it still works out to more than $200 million a year that PepsiCo would lose out on, which is a lot of Cheetos. So do you think there's a chance that this fight that's going on between Carrefour and PepsiCo could spread beyond France and Europe to other parts of the world or even to the United States? It definitely could happen. I would guess that it might not be as nasty. The animosity really took me by surprise in this fight because there's always tension in negotiations between

retailers and food manufacturers, but the mudslinging was really surprising. Usually the two sides publicly and to shoppers will say, we're very sorry for the inconvenience. We hope to resolve this soon. And this French food fight is not that. Regardless of what happens in this particular dispute with Carrefour and PepsiCo, what do you think the lesson is for companies when it comes to price increases?

I think that this and other signals are pointing to the sort of the saturation point that consumers have reached in terms of ability to absorb price increases on foods. So yeah, I think that this Carrefour fight, it suggests that we've hit the breaking point in terms of how far food price increases can go. That's all for today. Wednesday, January 17th. The Journal is a co-production of Spotify and The Wall Street Journal. Additional reporting in this episode by Trevor Moss, Mauro Ora, and Sam Schechner. Thanks for listening. See you tomorrow.