Investors Go Cold on Food Stocks; As consumers start to feel stretched, price increases by packaged-food companies like Campbell Soup and J.M. Smucker might not stick

Campbell's shares fell Wednesday, adding to a significant decline for this year. 

Appetite for shares in packaged-food companies has suddenly soured. A key concern is that the tailwind they have gotten from hiking prices, first as demand surged during the pandemic and then again in response to input inflation, could soon end.

J.M. Smucker and Campbell Soup both reported quarterly results this week that on the surface looked positive. Smucker said organic sales—excluding the impact of divestitures and currency movements—rose 11% from a year earlier in its fiscal fourth quarter ended in April. That and its earnings per share were both ahead of analyst estimates. Campbell said organic sales rose 5% in its fiscal third quarter, in line with estimates, and reported an earnings-per-share decline due to some one-time factors in the year-earlier period that was nonetheless in line with analyst expectations.

But investors spat out the shares, sending Smucker down 1.8% after its report on Tuesday, and Campbell down more than 5% early Wednesday following its results. Both were already down significantly so far this year after posting strong returns in 2022.

Campbell Chief Executive Mark Clouse characterized the company's snacks division as "on fire," seeing 12% organic-sales growth and expanding margins in the quarter. But concerns were centered on soup sales, which in the U.S. fell 11% on the year. This was largely due to a high base for comparison in the year-earlier quarter, when Campbell's supply chains were recovering and it was aggressively restocking inventory at retailers, Clouse said on a conference call with analysts.

Yet "in-market performance," meaning end-sales by retailers to consumers, was still basically flat in the quarter, the company said. Because Campbell has raised prices significantly over the period, this suggests that unit volumes declined. Clouse said the company is still gaining share in core products such as the Campbell's Chunky line and its four most popular condensed soups but is losing share in other more peripheral products like the higher-priced "Healthy Request" line of soups.

Still, he argued that there is no reason for alarm, as the company's competitive positioning in soups is far better than it was before the pandemic and before the entire line was revamped. Clouse said he sees no prospect of a return to the prepandemic competitive environment in soup, which featured heavy promotions and a "race to the bottom" on pricing, in the words of one analyst.

This is likely true. But the bigger concern for investors in the entire food space is that consumers have been pushed to the limit by price increases, and that discounting could soon start to pick up again.

"As time goes on, there's no question consumers are starting to feel that pressure," Clouse told analysts on Wednesday's conference call. The company is beginning to see consumers do things like make more purchases early in the month, suggesting budgets are getting stretched, he added.

Last month, Walmart Chief Executive Doug McMillon said the company is working with suppliers to get costs down in the prepared food and consumables categories "as fast as we possibly can."

Smucker CEO Mark Smucker, asked about pricing pressure from competitors on his conference call with analysts on Tuesday, said that "we are not seeing anything out of the ordinary." But he did say that the environment for price promotions is "very similar to prepandemic."

In the prepared-food aisles, a return to the difficult prepandemic normal isn't exactly what investors want to see. Just how much of the price increases food companies have pushed through in recent years will stick is now top of mind with their anxious shareholders.