KANSAS CITY — Amid surging inflation beginning in 2021, food companies labored to keep pace with escalating costs through price increases. Announcing round after round of pricing action, executives said the moves were taken amid close communications and cooperation with food retailers who understood input, labor, energy and transportations costs were rising rapidly.

Josh Sosland, editor of Milling & Baking News. 
Source: Sosland Publishing Co. 

While crediting management teams responsible for taking necessary steps to remain profitable, investment analysts, at the time, expressed unease over whether the cooperative spirit between the food companies and retailers would endure amid mounting consumer discontent over the food price inflation. The apprehensions have proven justified. Numerous signs have emerged during the past couple of months suggesting retailers are pressuring suppliers to dial back prices.

Food companies have described the pressure to suppliers, and in some cases have begun issuing new requests for proposals from ingredient companies in the hopes of securing more attractive pricing. Supermarkets and other retailers are said to be urging food companies to either step up promotions or lower costs, using access to shelf space as leverage.

The nation’s largest retailer has spoken publicly about its need for lower prices.

In an investment call in mid-November, C. Douglas McMillon, president and chief executive officer at Walmart Inc., said food prices remain above levels prevailing one and two years back and said the higher costs were “putting pressure on our customers.” He suggested food manufacturers are and would be lowering prices.

“We’d like to see more (disinflation) faster, especially in the dry grocery and consumables categories,” he said.

He said lowering food prices is necessary to boost Walmart’s broader business.

“If the food prices come down in dry grocery and consumables and we start seeing deflation in those categories, that will free up dollars to be spent in general merchandise,” he said.

The food price inflation picture is a complicated puzzle with numerous pieces.

The cumulative inflation experienced by consumers has been considerable. For grain-based foods, prices in November 2023 were sharply higher than in February 2020, just before the start of the COVID-19 pandemic. Measured by the Consumer Price Index, price increases for bread, cereals, cookies and crackers over the period ranged from 29% to 37%. Overall, grain-based foods price increases have outpaced the CPI for all food at home, up 24% between February 2020 and November 2023. The average CPI during this period rose 19%.

Higher prices have not generated a windfall for food companies. A look at financial results shows pressure on food sector profit margins has eased from 2021 and 2022 when companies couldn’t keep pace with rapidly escalating costs. Still, food companies don’t have much wiggle room to lower prices without severely cutting into profitability. Relative to just before COVID, adjusted operating margins at CPG companies such as Mondelez International Inc. and The J.M. Smucker Co. have been flat. Other companies, including General Mills, Inc., Flowers Foods, Inc. and PepsiCo, Inc., generated wider profit margins of about one to three percentage points than in the quarter just before the pandemic started.

Ingredient costs have not retreated to pre-COVID levels. The Milling & Baking News index for bread ingredient costs, for example, has declined significantly from recent highs but remains 27% higher than in February 2020. Cracker ingredient costs are up 44% over the same period.

Wage price increases also have taken a bite from margins. Bureau of Labor Statistics data indicate average hourly wages for the nondurable manufacturing sector were up 18% in November 2023 from February 2020. In the case of bread and tortilla manufacturing, average wages jumped 28% during the period.

Price cuts by grain-based foods companies of even 1% to 3% would wipe out margin gains, without offering consumers meaningful relief. Elevated and still rising costs are a reality for food manufacturers, and it is a mistake for retailers to look for food price reductions as a “magic bullet” to restore consumers’ zest for shopping.