From Diapers to Soda, Big Brands Feel Pinch as Consumers Pull Back

Procter & Gamble Co. and PepsiCo Inc. posted lackluster sales in the most recent quarter as producers of some of America's biggest consumer products struggle to give shoppers what they want.

The two companies, which make everything from soda and chips to diapers and toothpaste, said Wednesday that slowed spending in the U.S. cut into their profits.

The results highlight the challenges makers of food, beverages and other consumer staples are facing as they try to adapt to changing tastes. Analysts say some big brands, such as Gillette and Yoplait, are losing ground to upstarts.

Overall purchases of consumer packaged goods in the U.S. declined 2.5% in unit terms in the first quarter, according to Nielsen. Big brands are struggling the most. The 20 largest consumer packaged-goods companies last year had flat sales while smaller ones posted sales growth of 2.4%, Nielsen says.

There are "probably more sources of volatility today that at any other time in history," P&G Chief Financial Officer Jon Moeller said Wednesday in a call with reporters.

U.S. economic growth slowed in the fourth quarter, and experts say the sluggishness continued into the start of this year. Economists surveyed by The Wall Street Journal are forecasting that gross domestic product, a broad measure of the goods and services produced across the economy, advanced by a tepid 1% in the first quarter from the previous three months.

That would mark a slowdown from the roughly 2% trend that has prevailed through most of the current expansion and which President Donald Trump is seeking to double. The U.S. Commerce Department releases its first read on first-quarter GDP on Friday.

Household spending has been healthy since the 2009 recession, helped by rising wages and falling gas and consumer prices. But much of the spending has been focused on home improvements, automobiles and entertainment.

Overall consumer spending in the first quarter was stymied by higher inflation in January and February and will likely pick up for the duration of the year, said Chris Christopher, director of consumer economics for IHS Markit. But he said companies that sell household staples face longer-term challenges.

"There are some behavioral changes: A lot more is going online, people are not getting married, they're living in smaller spaces, and they aren't having as many children," he said. "That's not going to turn around very fast."

P&G's latest quarter was its weakest of the fiscal year as organic sales -- a closely watched metric that strips out currency moves, acquisitions and divestments -- rose just 1%.

Mr. Moeller said consumers are cutting back purchases, aggressively seeking deals and drawing down supplies at home. At the same time, he said, a growing affinity for beards has played a big part in driving down razor sales, which contributed to a 6% organic sales decline for P&G's grooming unit.

Although pricing increases helped PepsiCo post growth in its beverage and snacks businesses in its latest quarter, sales declined in its Quaker Foods North America unit, which sells grocery staples such as Rice-A-Roni, Aunt Jemima and its namesake oatmeal.

PepsiCo, like big food rivals Kraft Heinz Co. and Nestlé SA, is struggling as consumers shift away from diet sodas and processed foods to fresher and healthier options. It has launched new products, such as a premium bottled water brand, to adjust to the shift.

"Our next challenge is how do we leverage our relationships with retailers to reinvent the center of the store?" said CEO Indra Nooyi on a conference call Wednesday. "And we need to do that in order to bring interest back to that whole cereal aisle and therefore, Quaker."

Overall for food and nonfood staples, big brands are struggling the most. The 20 largest consumer packaged-goods companies last year had flat sales, while smaller ones posted sales growth of 2.4%, according to Nielsen.

Anna Kunz, a 42-year-old painter, said she has started shopping for fresh produce and meat instead of canned or boxed food in recent years, because she wants her 13-year-old daughter to eat healthy.

"Clean eating. That's what it's all about," she said at a grocery store in Chicago, with sugar snap peas and strawberries in her cart. She says that is much harder to do on a budget, and even though she is nervous about the economy, "It's health. You've just got to do it."

While 17% of U.S. consumers reported an improvement in household financial conditions over the past six months, it wasn't enough to trigger higher spending, said John Baumgartner, a food analyst at Wells Fargo, based on its quarterly consumer survey. Respondents also reported a 21% rise in eating leftovers at the expense of grocery purchases.

Hershey Co., which reported lower-than-expected sales growth Wednesday, said people are snacking more often, but U.S. food retail trends are "choppy" overall, perhaps exacerbated by delayed tax refunds and more online shopping. The chocolate giant lowered its sales forecast for the year "given the uncertainty regarding overall U.S. brick-and-mortar retail trends."

Wal-Mart Stores Inc., meantime, has been reducing inventories and slashing prices as it fights to compete with Amazon.com Inc. and European discounters moving into the U.S. Those cuts are eating into Wal-Mart's own profit and, in turn, leading the world's biggest retailer to put pressure on its vendors.

Kimberly-Clark Corp. this week reported its first quarterly organic sales decline in 13 years, driven largely by falling demand in North America. The maker of Kleenex tissues and Huggies diapers lowered its forecast for the year but said it expects better performance as the year progresses.

Nestlé Chief Executive Mark Schneider said weak U.S. demand isn't an issue isolated to Nestlé and that it reflects a breakdown in the usual relationship between economic growth and consumer spending. At the same time, he said, intense competition is making it harder to push through price increases.

"In spite of good economic data, we are seeing a large amount of uncertainty" in the U.S., Mr. Schneider said last week on an investor call. "When that uncertainty subsides it will be good news."

While growth is stronger outside the U.S. for many companies, foreign markets also are rife with volatility. P&G said everything from the Brexit in Europe to political uncertainty in developing markets has made for bumpy times in overseas operations.

The dynamics are driving tough choices for companies as they are forced to decide between reducing prices and ceding market share. PepsiCo and Coca-Cola Co. have been shrinking packages and raising prices. P&G has been lowering prices in some of its biggest categories such as diapers and razors, forcing down prices of rivals as well.

"Don't ask me who started it," Kimberly-Clark Chief Executive Thomas Falk said of price wars in consumer products. "Everybody thinks it's the other guy."

--Jennifer Maloney and Brian Blackstone contributed to this article.

Write to Sharon Terlep at sharon.terlep@wsj.com and Annie Gasparro at annie.gasparro@wsj.com

(END) Dow Jones Newswires

April 26, 2017 19:59 ET (23:59 GMT)