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Industry News & Insights


26 Aug 2022

As inflation rages, food and beverage manufacturers pass higher costs on to consumers

As inflation rages, food and beverage manufacturers pass higher costs on to consumers

Food and beverage manufacturers are facing higher input costs across their businesses, leading to a jump in the prices consumers pay for everything from peanut butter to turkey that is likely to ensnare other offerings this year.

The pressure is coming from all sides. Beverage makers are facing a jump in expenses for packaging like aluminum. Meat prices are on the rise as the cost for grain to feed animals like turkey and hogs climbs.'A surge in freight, transportation and manufacturing costs as well as pandemic-related expenses also are weighing on producers. These come on top of investments by'CPGs'in innovation to respond to consumer trends, boost their e-commerce presence and lessen their environmental footprint.'

"Before we might have seen price increases because of a certain raw material, or feed for animals, but we've never seen this perfect storm hit packaging, transportation, cost of goods, all of the above, while at the same time we have certain overarching issues that the industry is coping with like sustainability,"'said Phil'Lempert, a food industry analyst and editor at'"It's a mess. It really is, and as a result the money has to come from somewhere."'

Coca-Cola, Unilever,'Nestl','Mondelez'International and General Mills are just a few of the companies whose executives have announced price increases in recent weeks or telegraphed to Wall Street that hikes are coming later in 2021 to offset rising expenses.'

"We now see broad-based inflation across our various commodities, packaging materials and transportation costs,"'Mark Schneider,'Nestl''s'CEO,'told analysts last month. "Not all of these items can be hedged, and our hedging cover for a number of commodities will run out over time. We are raising prices where appropriate."

Federal Reserve Chairman Jerome Powell said in March'further upward pressure on prices across the U.S. economy could take place "if spending rebounds quickly as the economy continues to reopen, particularly if supply bottlenecks limit how quickly production can respond in the near term."

Any further increases in food and beverages would come on top of pressure already placed on the industry. Food at home posted a scant 0.1% increase in March from the prior month, but that follows a 3.3% jump in the prior 12 months,'according to the Labor Department's recent consumer price index report. The six major grocery food groups measured by the department have increased in the last year, ranging from 1.6% in dairy and related products to 5.4% in meats, poultry, fish and eggs.

The jump in expenses is causing food and beverage manufacturers to assess all aspects of their business in a bid to wring out costs, including their product mix, supply chain and promotions.

The sector experienced a 0.3% increase in promotional activity in March compared to the same month a year ago, according to data provided by NielsenIQ. But even with the slight uptick, only 28.6% of units are being sold with a promotion compared to 33% on a typical week before the pandemic. As a result, the analytics firm estimated shoppers are paying slightly more for food and beverage offerings as a whole than prior to the outbreak.

Industry-wide impact

The inflation and corresponding price increases have been a frequent topic of discussion during recent earnings calls across the food and beverage landscape.'

Dairy giant'Danone said in its first quarter earnings report'released in April that it was forecasting "a broad-based acceleration of inflation in milk, ingredients, packaging and logistics." In its third-quarter earnings call,'J.M.'Smucker told analysts'it implemented 'pricing actions in response to higher costs and competitive supply disruptions,' including a price boost for its'Jif'peanut butter that was quickly copied by its competitors.

Coca-Cola CEO James Quincey noted in an interview with CNBC'that while the world's largest nonalcoholic beverage maker is well-hedged this year, "there's pressure built up for '22" that will necessitate some price increases. We intend to manage those intelligently, thinking through the way we use package sizes and really optimize the price points for consumers,"'Quincey'told the business network.

Hormel Foods has already implemented a series of price increases in products such as Skippy peanut butter, Columbus Craft Meats, Spam, deli meat and Jennie-O, whose turkey offerings have been hit hard by escalating grain prices. "While I am confident in our pricing power and expect margins to stabilize in the back half of the year, continued escalation in grain prices will require additional actions,"'Jim'Snee, Hormel's president and CEO,'said in February.'

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