Shoppers search for items at a Costco wholesale store on August 4, 2020 in Colchester, Vermont.
Robert Nickelsberg | Getty Images
Inflation is coming.
Look no further than Coca-Cola and Procter & Gamble’s plans to hike prices this week to offset rising raw material costs. The cost of raw materials, which range from lumber to resin, is rising, and companies are taking steps to protect profits.
The price increases follow a year of increasing demand for a variety of items, from paper towels to peanut butter jars. Sales of packaged consumer goods rose 9.4% to $ 1.53 trillion last year, according to the Consumer Brands Association. Many manufacturers withdrew advertising and promotions to keep up with demand and gain market share without much marketing.
James Knightley, chief economist at ING International, predicts consumer prices will continue to rise in the near future, up nearly 4% year over year by May. The consumer price index, which indicates how much US consumers pay for a shopping cart, rose 2.6% in March compared to the same period last year, according to the Department of Labor.
The stocks are “too low”.
Low inventory levels help companies improve their pricing power, he said.
“According to the Institute for Supply Management, the latest survey found that 40% of manufacturers say their customer inventories are running low,” Knightley said. “This is further evidence that corporate pricing power is increasing.”
Food industry analyst Phil Lempert said numerous factors have increased costs for farmers who pick produce, factories that make packaged consumer goods, and meat packers who process beef, pork and chicken. The ports are congested, the truck drivers are scarce and the food workers have to try to distance themselves socially. That makes it harder to keep up with demand and ship items, from cereals to Italian cheeses, worldwide.
Price increases are secret
Moody’s analyst Linda Montag said she does not see higher prices as a competitive advantage as all consumer businesses face higher raw material costs. In addition to Coke and P&G, PepsiCo, Kimberly-Clark, General Mills and JM Smucker have dealt with price increases. And consumers may not even realize they are paying more for diapers or soda.
“Consumer companies across the board are very adept at implementing price increases without having to forego price increases of five to 10%,” Montag said in an interview.
Some of these methods include using new packaging, selling smaller packaging for the same price, or offering promotions that lower the price until consumers are used to the higher sticker price. Hedging positions also allow some manufacturers such as Coke and Pepsi to gradually increase their prices more flexibly, as they do not feel the effects of higher raw material costs for several quarters.
More cash in consumers’ pockets means less risk
Rising prices always carry the risk that the demand for these products will decrease. However, Moody’s analyst Chedly Louis said she doesn’t expect consumers to resort to private label products because consumers trust bigger brands during the crisis. This behavior is expected to last longer.
“There is potential for consumers to move to cheaper, lower margin products within P & G’s product portfolio. It’s still P&G, but it’s cheaper,” said Louis.
Many consumers also have more cash in their wallets from doing government stimulus checks and years without travel, sports games, and fine dining.
Not all companies have the same flexibility to raise prices. Piper Sandler downgraded Kraft-Heinz shares on Friday, citing the company’s relatively weak pricing power as the reason for the decision. Analyst Michael Lavery wrote that the company’s pricing power lags behind that of peers like General Mills, Mondelez, and Hershey, so rising prices could hurt demand.
Discounts are rare
Most retailers will pass the higher prices on to consumers. Lempert said grocers are juggling more expensive services like online grocery delivery or roadside collection, leaving little margin for profit margins to absorb higher grocery costs.
Grocery costs had already risen as retailers offered fewer discounts while shoppers cleared shelves last spring and bought more cooking utensils than usual in the months that followed. Phil Tedesco, vice president of Retail Intelligent Analytics at NielsenIQ, said that in a typical month, 31.5% of units will be sold through promotions. In March, only 28.6% of the units were sold through promotions.
“This has resulted in fewer opportunities for shoppers to take advantage of the in-store sale, and as a result, the total cost of food products has increased slightly,” he said.
JP Morgan analyst Ken Goldman wrote in a statement to customers on Monday that higher prices will help grocers, especially given harsh comparisons with last year’s exploding demand.
“Too much inflation is bad for grocers, but a 2-3% increase (roughly the percentage that producers must go through) with a shift in the mix towards higher-priced products is likely to help a lot right now,” he said.
– CNBC’s Melissa Repko contributed to this report.