What goes up must come down? Not necessarily, if you’re talking about food prices. Cash-strapped consumers may finally see some relief at the grocery store, but shouldn’t expect prices to fall sharply. Instead, the rate of increases will ease. At the same time, some packaged food companies have the wiggle room to accelerate year-end promotions in an effort to juice volume and appease value-seeking shoppers. That’s good for consumers, but only a few stocks stand to gain through this environment, analysts say. Inflation is, on average, coming down, but individuals aren’t necessarily feeling that in the checkout line at their grocery store, according to food and agricultural economist David Ortega. Price decreases this year compared with last year are more noticeable in only a few products, such as eggs. “We’ve been experiencing significantly higher than what was considered to be ‘normal’ with regards to the rate of food price increases than we were prior to Covid,” Ortega, an associate professor at Michigan State University, said. “On average, when we look at a comparable [grocery] basket, year-over-year, it’s still more expensive now than it was a year ago.” Using the consumer price index data from the USDA, the pace of year-over-year price increases continued to slow for food-at-home. Those grocery store and supermarket purchases were 2.1% higher in October 2023 than in October 2022, marking the lowest year-over-year increase since June 2021. The food categories that had lower prices in October compared with the same month last year were eggs, fresh vegetables, dairy and fish and seafood. Prices of packaged goods tend to be sticker, on the other hand, and will likely experience disinflation, or prices rising at a slower rate, Ortega said. How to play the ‘volume recovery’ trend According to Bank of America, packaged food companies have seen volume declines stagnate at low mid-single digit rates. Volume measures sales without the impact of price changes and currency fluctuations. Besides inflation, volume has been hurt by fewer product launches and promotional events since the pandemic, the firm said. Consumers also are shifting to perimeter aisles to buy fresh meats and vegetables instead of center-store categories, and are trying to reduce food waste — and therefore reducing volume, analyst Bryan Spillane wrote in a Nov. 15 note. Unlike fresher items like meats and dairy, dry and frozen foods do not see as much “pass-through pricing,” which makes pricing more fixed until it’s time for a promotion, according to Bank of America analyst Peter Galbo. “The contribution that the companies are bringing from pricing is going to go from having been mid-teens last year, to high-single digit, … and then eventually it’ll go to zero,” Galbo said. “Now we’re at the point where most of these companies are fully lapping the price increases they took a year ago.” Shares of the major packaged food companies — including Kellanova , Kraft Heinz , General Mills , Conagra Brands and Campbell Soup to name a few — have faced significant declines this year, but have largely crawled back into the green over the past month. Holiday promotions Kraft and McCormick are the companies that are best-positioned to benefit from merchandising and promotional activity around Thanksgiving and Christmas holidays this year, Galbo said. Those efforts, along with continued product innovation, could potentially help the companies’ volumes improve in the first half of 2024. Shares of Kraft, which owns Philadelphia Cream Cheese, Lunchables and Kool-Aid among a myriad of other brands, have slumped about 11% this year, but are up nearly 8% for the quarter. Bank of America’s $40 price target suggests 10% upside from Friday’s close. Shares climbed in the past month after Kraft had topped third-quarter earnings estimates and raised its 2023 profit estimate for the second time this year. Earnings were buoyed by higher prices for Kraft’s packaged goods, which were implemented to combat lofty supply chain and commodity costs, but the company’s volumes slipped during the quarterly period. Rather than returning to the more intense pre-pandemic levels of promotions, Kraft plans to massively invest in revenue management and artificial intelligent tools in order to achieve profitable volume growth, the company’s president Carlos Abrams-Rivera told CNBC in early November. “For Kraft, they still haven’t been merchandising at more normalized levels and they tend to be skewed, even more so than some of the others, around key holiday periods,” said Galbo, who holds a buy rating on the stock. He also noted the company is rolling out new products such as Lunchables Grilled Cheesies and frozen Kraft Mac & Cheese that can help boost growth. McCormick is the other frontrunner among packaged food companies, Galbo said. The stock, which is down 11% for the quarter but is trading higher this month, has fallen 19% this year. Bank of America’s $86 price target implies potential gains of nearly 28%. The spices and condiments manufacturer is seeing similar trends as Kraft, having also raised its annual profit forecast on higher product prices. The company’s sales volumes dropped 2% in the third quarter, however, as consumers sought out cheaper alternatives to McCormick’s products. Management remains positive on its near-term growth, noting gross margin improvement year-over-year and savings from its cost optimization programs. “With our supply issues resolved, we are better positioned than we were last year entering this season,” McCormick President Brendan Foley said during the company’s third-quarter earnings call on Oct. 3. “We are increasing our merchandising levels to one similar to pre-Covid and are supporting our portfolio with holiday brand marketing campaigns across all regions. We are expecting a strong holiday season.” While other major food companies are planning on boosting their promotions over the next few months, Galbo pointed out that the holidays are not a major focal point for each company. J.M. Smucker , known for its peanut butter and jelly products, and General Mills, which has a large pet food portfolio, for example, do not rely on the holidays to boost sales. Pringles maker Kellanova has been slower to merchandise relative to its peers, and still has room for growth, the analyst noted. ‘Reduced skepticism’ With shares steadily climbing higher for many packaged goods companies, Galbo anticipates investors are attempting to figure out if the sell-off in the subsector has been overdone. “I wouldn’t call it optimism. I would call it reduced skepticism,” he said about investor sentiment. This summer, food stocks were beaten up as investors feared more calorie conscious consumers would purchase fewer snacks. There were also fears the focus would be on value as the economy weakened. But the narrative has been building that the economy is heading for a “soft landing” and consumer inflation expectations have eased , according to the latest consumer sentiment survey from the University of Michigan. “I would expect the rate of inflation to continue to moderate and there’s signs of that. Things are headed in the right direction,” Ortega said. “Now, looking at the trend, all of these shocks and the effects have to work their way through the supply chain down to the consumer. We’re seeing light at the end of the tunnel. But there’s just a little bit more to go.”