A customer shops at a grocery store on February 10, 2022 in Miami, Florida. The Labor Department said consumer prices jumped 7.5% last month from 12 months earlier, the biggest year-over-year increase since February 1982.
Joe Raedle | Getty Images
Food and drink prices are rising, but CEOs from PepsiCo’s Ramon Laguarta to Tyson Foods’ Donnie King say consumers aren’t yet averse to paying more for their Lay’s crisps and chicken nuggets.
Inflation has led many food and beverage companies to raise prices by reducing package sizes, removing promotions, or raising prices at the grocery store outright. But companies must strike a delicate balance, raising prices enough to offset higher costs without making products too expensive for consumers, who could always opt for cheaper alternatives like private label.
“We’re pleased with how our consumers are staying loyal to our brands despite some of our pricing decisions,” Laguarta said during Pepsi’s earnings call in early February.
In January, the producer price index for final demand rose 1%, according to the Bureau of Labor Statistics. The measure tracks rising costs paid by domestic producers for commodities. For food, prices were up 1.6% from December and 12.3% from 12 months ago.
Consumers, on the other hand, saw food prices rise 0.9% in January from the previous month and 7% from the year-ago period, according to the Consumer Price Index. of the BLS. Many shoppers have had more money to spend on groceries after receiving government stimulus checks during the pandemic and changing other behaviors, such as traveling and eating out less.
These measures of inflation came before Russia’s invasion of Ukraine, which has already led to soaring prices for oil and gas, metals and grain, all of Russia’s key exports. Aluminum prices hit a record high of $3,450 a tonne on the London Metal Exchange. Still, most companies are hedging to protect against short-term commodity price spikes, although at this stage it’s unclear how long the crisis will persist and when buyers will start to feel its effects.
“Cracks in the foundation”
On Thursday, Procter & Gamble, which makes consumer staples like Tide detergent and Pampers diapers, sounded cautious when talking about its ability to weather rising inflation.
“While it is too early to declare success, given the strength of our portfolio, broad-based equity gains and early market results, we feel relatively well positioned in our position to execute. pricing,” Chief Financial Officer Andre Schulten said in the company’s virtual CAGNY. presentation.
P&G raised prices in its 10 categories in the United States, affecting about 80% of sales in its home market. The consumer giant may have the right approach, warning investors that there may be bumps in the road ahead.
“The pile of cash that most consumers are sitting on is rapidly shrinking, and we’re seeing the elasticity starting to return to normal, pre-pandemic levels, and with inflation and gasoline prices, we’re seeing pockets of the market where we are are starting to see some weakness,” RBC Capital Markets analyst Nik Modi said in an interview.
Modi said categories that tend to skew lower incomes, such as tobacco, beer and energy drinks, are starting to see consumers turn to cheaper options.
“There are cracks in the foundation, and we’ll have to watch,” he said.
Walmart, the largest grocer in the United States, said shoppers are paying attention to rising prices and inflation, although it is not yet showing in their behavior. Chief Financial Officer Brett Biggs said in an interview last week with CNBC that low unemployment, rising wages and an increase in household savings during the pandemic mean average consumers are still in good shape.
Brewer Miller Lite Molson Coors Beverage echoed that line of thinking during its earnings call on Wednesday. The beverage company raised prices by 3% to 5% in January and early February – earlier than its usual price increases in the spring and at a slightly higher level than usual.
“Frankly, prices are going up, as I just said, for us, 3% to 5%, well below inflation rates, which are still on the minds of consumers,” CEO Gavin Hattersley said.
Price hikes face backlash
Even though consumers are not yet shy about raising prices, some companies have already been criticized for raising prices to protect their profit margins.
For example, Senator Elizabeth Warren, a Democrat from Massachusetts, took aim at Tyson for his price hikes, saying the increases exceeded necessary levels because the company doubled its fiscal profits in the first quarter.
Tyson is already the subject of intense scrutiny from the Biden administration, which has argued that consolidation in the meatpacking industry has driven up the prices of beef, chicken and pork these last years.
But Tyson defended his actions. In a statement to CNBC, the company said: “Economists and industry analysts confirm that the current rise in meat prices is a direct result of limited supply due to labor shortages. labour, rising input costs for things like grain, labor and fuel, and stronger consumer demand.”
In early February, Tyson said its cost of goods sold was up 18% from the year-ago period. In response, its average selling price for its first fiscal quarter soared 19.6%.
“It helped us capture some of the unrecovered costs due to the lag between inflation and prices,” CEO King said during the company’s latest earnings call with analysts.
Tyson executives also said consumers are still not hesitant to pay more for convenience foods, including its Jimmy Dean and Hillshire Farm brands.
RBC’s Modi said the cost increases faced by companies like Tyson are real.
“Now do they need to take the prices? Not to survive, but they need to take them to protect their margins,” he said. “Protecting their margins allows them to reinvest in marketing, in [research and development.]
“Quite frankly, retailers wouldn’t let them accept cost increases if they weren’t justified,” he added.
For example, Walmart CEO Doug McMillon said on his earnings call that the retailer relies on its long relationships with food and beverage companies to keep prices low for customers.
“During times of inflation like this, middle-income families, lower-middle-income families, even the wealthiest families become more price sensitive,” McMillon said.