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 Coke and Procter & Gamble share plans to raise prices this week to compensate for 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. Sale of 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 is how much US consumers pay for a shopping cart, rose 2.6% in March from the same period last year according to the Ministry of Labor.
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 ‘too 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.
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 Cola and P & G PepsiCo, Kimberly-Clark, General Mills and J. M. 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.
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 a reason for the decision. Analyst Michael Lavery wrote that the company’s pricing power lags behind that of peers like General Mills, Mondelez and HersheyTherefore, rising prices could affect demand.
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 in-store sales and as a result, the total cost of food products has increased slightly,” he said.
Ken Goldman, Analyst at J.P. Morgan, on Monday, wrote in a note to customers that higher prices will help grocers, especially given harsh comparisons with last year’s skyrocketing 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.
– CNBCs Melissa Repko contributed to this report.