Wow, that took a while.

From consumers’ perspective, there was favorable news on Thursday morning as CPI declined by 0.1% in June to a rolling 12-month rate of 3.0%.*  As they say, the trend is your friend, and we have now seen three solid months of tame inflation readings which bodes well for a September Fed rate cut – in fact, the probability increased to 91% on Thursday from 74% the day before.**

PepsiCo, the beverage and snack food consumer staple giant, reported earnings and disappointed, both in terms of declining volumes in North America and cautious forward guidance for full-year 2024 sales.  Management indicated that consumers are finally pushing back on multi-year price increases by buying fewer items and substituting with lower-priced, private label alternatives.  The prepared remarks sounded somewhat surprised by this revelation.

Beware of the revenue growth charlatans, whose consistent price increases are masking volume issues. 

On the one hand, this certainly demonstrated pricing power – frankly, more than we were expecting for a category like snack foods, especially given some of the ancillary impacts from the wider adoption of GLP-1 weight loss drugs, which reduce appetite and therefore consumption.  While it lasted, that is.  On the other hand, the eventual reckoning is very painful and will take time for even the best companies to regain their footing as they reassess and revamp their pricing and packaging strategies to demonstrate value to consumers.  For the poorly managed, growth may remain elusive and “bounce backs” may be fewer and far between.

Even titans like Apple and Tesla are losing share abroad.

Just another example of many having been “fat and happy” for too long. After all, the growth formula was simple: “take price” while delivering less value – rinse and repeat.  Yet, previously unassailable blue-chip brands, from Nike to Starbucks, are faltering.  Competition to stay at the forefront of the consumer’s imagination is a constant battle and missing the mark with the latest fad/trend can be costly.  Further, while international consumers used to crave American brands – especially in places like China where certain brands conveyed status for the up-and-coming middle class – protectionism, nationalism and state-sponsored/assisted local competition is eroding the status quo. 

Look for generic margins to be tested in the next few quarters.

Going forward, Investors should be more specific and discerning in sorting out the winners and losers in a world where the old, and perhaps simplistic, rules no longer apply. Especially if economic activity continues to decelerate and once protective moats keep shrinking. 

*  Source: US Bureau of Labor Statistics

**Source: Bloomberg

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The Validus Rising Dividend strategy  invests in Nike (NKE).  Securities highlighted or discussed in this blog have been selected to illustrate Validus’s investment approach and/or market outlook and are not intended to represent any strategy or portfolio performance or be an indicator for how strategy or portfolio have performed or may perform in the future. Each security discussed in this blog has been selected solely for this purpose and has not been selected on the basis of performance or any performance-related criteria. The securities discussed herein do not represent an entire portfolio and, in aggregate, may only represent a small percentage of a strategy or portfolio holdings. The strategies and portfolios are actively managed, and securities discussed in this blog may or may not be held in such strategies or portfolios at any given time. These individual securities do not represent all the securities purchased, sold, or recommended and the reader should not assume that investments in the securities identified and discussed were or will be profitable. Nothing in this blog shall constitute a recommendation or endorsement to buy or sell any security or other financial instrument referenced in this letter.

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