I recently read an article on CNBC.com called, "Why Consumers May Be On A Crash Course." Not surprisingly, the actual content of the article is not filled with the dire facts and figures one might expect from the title. But it did point out something interesting about consumer behavior and also reminded me of something else I've noticed happening in supermarkets over the past few years.
The article's focus is on Coupon.com's "Internet Coupon Index," which has been steadily rising since last spring and gone vertical in recent months, breaking out of the elevated range it began to establish just prior to the recession beginning in December 2007 (see article for chart). According to Coupon.com, the chart is showing an acceleration both in the demand for coupons and in the number of coupons being offered. The company's CEO, Steven Boal, told CNBC that he views the index as a leading indicator of economic activity and that the recent spike is a troubling sign. He also pointed to the payroll tax hike and rising food and gas prices as strains on household budgets.
Naturally, one can point to the increase in the payroll tax and elevated gas prices as real-time, very visible strains on the budgets of many American households. It terms of rising food prices, this too would put a strain on household budgets. But it is not always as easily seen because stealth inflation is alive and well in the world of food products.
By stealth inflation, I am referring to a reduction in the quantity of product offered while not reducing the price of the item by an amount equal to or greater than the percentage decrease in product. I've noticed this occurring with many products over the past few years. Several examples include the following:
Pepsico (PEP) has been a big offender through its Quaker and Frito-Lay businesses. Have you noticed the shrinking amount of Life and Oatmeal Squares cereal inside their boxes? The number of Quaker chewy granola bars per box was also reduced in recent years. Additionally, Pepsico's Lay's potato chips provide another example of shrinking product size in recent years. All the while, prices have not been declining concurrently.
The Coca-Cola Company (KO) has also participated in spreading stealth inflation to the U.S. economy. It reduced the size of its Minute Maid Orange Juice containers. Kellogg (K) shrunk the size of its Raisin Bran boxes. General Mills (GIS) participated in stealth inflation by reducing the amount of ice cream in its Häagen-Dazs brand. Among others, if you investigate the recent history of your favorite Procter & Gamble (PG), Kimberly-Clark (KMB), and H.J. Heinz (HNZ) products, you will likely discover similar stealth inflation.
What message is stealth inflation sending? I am of the impression that companies would prefer to raise prices on the same-size product they already have rather than having to reduce the size of a product and raise prices by less than they otherwise would. The fact that companies feel forced to reduce the amount of product being sold, rather than simply raising prices by the amount they would prefer to raise prices, is a testament to just how strained the household budget of many Americans is and also how little pricing power many of the best known companies in the world have nowadays.
An interesting observation regarding the companies mentioned above is that they could have all easily been featured in an article about companies favored by dividend-seeking investors. And that brings me to this point: If you invest in equities largely for dividend growth, keep in mind that companies will need to grow earnings over time in order to also continuously grow the dividend as well. I realize that stock buybacks and cost cutting can help increase earnings per share, but if you plan to hold a stock for many years and hope for dividend growth during that time, you will also need revenue growth to be a part of the picture. With shrinking product size as widespread as it's been in recent years, dividend-growth investors should spend some time thinking about the pricing power their companies actually have and how much revenue growth one should realistically project going forward. Without a thriving labor market that produces an abundance of well-paying, full-time jobs and without adequate wage increases, it is hard to imagine pricing power returning for any of the aforementioned companies any time soon.
Additional disclosure: I am long PEP bonds.