Despite growing food and beverage costs, CEOs like Ramon Laguarta of PepsiCo and Donnie King of Tyson Foods say consumers aren’t protesting the increased cost of Lay’s potato chips and chicken nuggets.
As a result of rising costs, several food and beverage manufacturers have had to increase their pricing by reducing the size of their packaging, eliminating special offers, or simply raising the retail price.
Consumers can always switch to lower-cost alternatives like private-label goods if prices are raised enough to cover increasing costs. However, corporations must strike a fine balance.
Laguarta stated on a Pepsi earnings call in early February that the company was “pleased” with how loyal its customers remained to its brands despite some of the company’s pricing changes.
According to the Bureau of Labor Statistics, the producer price index for final demand gained 1% in January. The indicator measures the rise in commodity prices paid by domestic producers. Compared to December, food costs increased by 1.6 percent, while they rose by 12.3 percent year over year.
Compared with a month earlier and a year ago, the consumer price index for food at the Bureau of Labor Statistics shows that food costs increased by 7% for January. Covid pandemic stimulus checks and other lifestyle changes have resulted in greater money in the grocery store for many consumers.
Measurements were taken before Russia’s invasion of Ukraine, which has already led to price increases for oil and gas (a significant Russian export), metals (a major export), and wheat (a major import).
On the London Metal Exchange, aluminum prices reached a record high of $3,450 per ton. It’s uncertain how long the crisis will last and when consumers will start feeling the pinch because most businesses hedge against short-term surges in commodity costs.
‘Faults in the building’s foundation’
While Procter & Gamble’s Tide detergent and Pampers diapers are household necessities, the company expressed skepticism Thursday about its capacity to deal with growing prices.
It’s too early to declare success, but CFO Andre Schulten stated in the company’s virtual CAGNY presentation that given the strength of the portfolio, broad-based share increases, and early in-market outcomes, “we feel relatively well-positioned about our position to execute pricing.”
About 80% of P&G’s sales in the United States have been affected by price increases in all of its domestic product categories. A warning to investors that things could become bumpy might be the proper strategy for the consumer powerhouse.
Because of rising inflation and gas prices, and because consumers’ cash reserves are rapidly depleting, RBC Capital Markets analyst Nik Modi said in an interview, “we are starting to see parts of the market where we are starting to see some vulnerability.”
Customers are beginning to switch to less expensive products in categories including tobacco, beer, and energy drinks, according to Modi.
We’ll have to keep an eye on it, he explained.
Walmart, the nation’s largest retailer, says consumers are aware of growing prices and inflation, even if it hasn’t yet affected their purchasing decisions… Last week, CFO Brett Biggs told CNBC that despite the pandemic, the average consumer is still in good financial health due to low levels of unemployment, rising wages, and more savings.
Molson Coors Beverage, the maker of Miller Lite, shared this sentiment on its quarterly results call on Wednesday. In January and early February, the beverage company hiked its pricing by 3% to 5%, which is a little more than the regular 3% to 5% increase in the spring.
To put it another way: “Frankly,” CEO Gavin Hattersley said in an interview, “the price hikes… for us, 3 percent to 5 percent, well lower than inflation rates, which are lingering in the minds of consumers.”
There is opposition to price increases.
In spite of the fact that consumers haven’t yet reacted negatively to increasing costs, some corporations have already received criticism for raising prices in order to safeguard their profit margins.
According to Sen. Elizabeth Warren, D-Massachusetts, Tyson’s price increases are beyond essential levels because the firm has increased its fiscal first-quarter earnings in the last few years.
Consolidation in the meatpacking business has been blamed by the Biden administration for driving up the price of beef, chicken, and pork in recent years.
Tyson, on the other hand, has defended itself. Economic and industry specialists agree that today’s higher meat prices are a direct result of constricted supplies due to a labor shortage, higher input costs for things like grain, labor, and gasoline as well as strong demand from consumers.”
Tyson reported an 18% increase in the cost of goods sold in the first two weeks of February, compared to the same time last year. As a result, its first-quarter average sales price increased by 19.6 percent.
“This helped us recover some of the unrecovered costs due to the timing lag between inflation and price,” CEO King stated in the company’s latest earnings call with analysts.
Customers, according to Tyson’s executives, aren’t protesting the price hikes on their Jimmy Dean and Hillshire Farm prepared foods just yet.
Companies like Tyson are feeling the pinch of rising costs, according to RBC’s Modi.
Isn’t it time to take the price off the table?” He didn’t say they had to take them to survive, but he did say they had to in order to safeguard their margins. Allows them to put their profits back into marketing and R&D.
To put it another way, “the retailers wouldn’t let them take cost hikes if it wasn’t legitimate,” he said.
According to Walmart’s CEO Doug McMillon, his company has long-standing ties with food and beverage suppliers to keep prices low for customers.
Families in the middle, lower-middle, and even upper-middle classes, according to McMillon, become more price-sensitive during times of high inflation.