By Bill Peters
Rising food prices could affect demand in Europe, where consumers appear to be shrinking, but analysts believe US consumers will continue to buy snacks and other products
Even as runaway food price inflation erodes consumers’ purchasing power and disproportionately affects low-income consumers, food company executives and Wall Street analysts believe Americans will continue to buy their food. favourites.
Across the industry – from snack maker Mondelez International Inc. (MDLZ) to coffee chain Starbucks Corp. (SBUX) to confectionery company Hershey Co. (HSY) – executives have proclaimed in earnings calls in recent days that they still have “price power”, “strong pricing” or “achievement of price” in the tank. In other words, despite all the price increases over the past year, they believe they have the ability to raise prices further or keep them high, if they so choose. In this industry, the so-called elasticity, a measure of the likelihood that higher prices will discourage consumers, has remained relatively low.
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Executives at Mondelez, which makes snacks like Oreo cookies and Triscuits, said following its earnings report on Tuesday that prices would rise in the United States, Europe and elsewhere next month. They were also making plans for more price increases next year. On Thursday, Starbucks executives said the chain’s “pricing power” – along with its younger customers, drive-thru and customizable drinks – gave them confidence they could hit their growth targets. sales for fiscal year 2023.
“So you have the pricing power of Starbucks,” chief executive Howard Schultz said during the company’s earnings call. “We’re definitely not going to try to raise prices during this time. But we’ve certainly demonstrated over the last 12 months or so that we have price increases of almost 6% and we haven’t seen loyalty and transactions. decrease.”
Schultz said Starbucks represented “affordable luxury” for customers. Similarly, Mondelez chief executive Dirk Van de Put said his company’s products are “affordable indulgences.”
Hershey Co. (HSY), which reported results on Friday, raised its outlook for the full year, citing “higher-than-expected consumer demand and favorable price elasticities,” or little change in demand in a world of higher prices. Hershey’s chief executive, Michele Buck, said on the company’s earnings call that its prices for next year would be similar to this year’s.
She said some customers were switching to cheaper snacks, but that business was not significantly affected.
“I would say historically our category has tended to do well during these times because it’s an affordable indulgence when consumers can’t afford a lot of other things,” she said.
See also: Hershey’s third-quarter results ‘crossed the high bar’ but outlook is conservative, says UBS analyst
Among non-indulgences, Kellogg Co. (K) said Thursday that its third-quarter results were “led by price realization needed to meet rising costs.” However, executives said consumer demand has not changed as much as expected. And they raised their full-year outlook to reflect those results, saying fourth-quarter sales growth would be “led by price/mix and continued momentum in our business.”
Wall Street analysts agree that companies still have ample power to continue to raise prices without seeing a huge drop in unit sales. Food, analysts note, is less discretionary than, say, a new television.
“We are seeing an improving fundamental backdrop, driven in large part by prices at a robust pace, elasticity remaining low (in fact trending down lately) and home food consumption remaining high,” Stifel food inventory analysts wrote in an Oct. 24 note.
“Our pricing outlook has increased such that we expect pricing to offset inflation in 3Q22 with our estimate of an increase in gross margin in 4Q22,” the analysts continued, adding, “our outlook are not without risk – prices must certainly remain at this high level.”
Read: New moms say inflation keeps them from paying for basic groceries
Coca-Cola Co. (KO), Kraft Heinz Co. (KHC) and Keurig Dr Pepper Inc. (KDP), which all reported profits last week, also said they raised prices. The full effects of these changes are still being felt.
“We expect inflationary pressures to continue, so we are taking advantage of all the levers in RGM [revenue growth management] available to us, including pricing, promotional information and proactive mix management,” Coca-Cola Chief Executive James Quincey said during the company’s earnings call last week.
In response to an analyst’s question on whether price increases will need to be as aggressive in the future, Quincey said the commodity price was unclear and they were still facing higher wages and supply chain issues.
But he added: “The name of the game is to optimize our revenue equation over the next 12 to 18 months. It’s going to be a combination of smart pricing, understanding the mix both from a channel perspective and of the package, and to be able to use the many levers that we have inside the RGM toolkit that our bottlers have.”
These companies raised prices in part to offset their own costs — those related to wheat, edible oils, dairy and other ingredients, as well as expenses related to higher wages. But the increases have led to increased profits and large payouts to investors for some companies, as well as concerns about greater pressure on customers and global shortages and hunger. Meanwhile, Kroger Co.’s (KR) merger agreement with Albertsons Cos. Inc. (ACI) has raised concerns that the merged company will cut out competition and charge customers more. Kroger, however, argued that it lowered its prices after previous mergers and acquisitions.
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And even amid big financial gains, executives noted a greater search for value among lower-income consumers. Chipotle Mexican Grill (CMG), which raised its prices, said lower-income shoppers stopped by less often, but noted that most of its shoppers were not in the low-income category. And McDonald’s Corp. (MCD), where price increases have also helped sales, said its lower-income consumers were starting to search for value deals more frequently.
Quincey, on Coca-Cola’s earnings call, said customers in Europe – where the energy crisis has deepened – were beginning to shift to cheaper products. To some extent, customers in the United States were also doing this.
“It seems to us that Europe is probably the most obvious example, where in the home channel you can see some private label growth in a number of categories,” he said. . “In beverages, you can see it growing a bit in water and juice. You can definitely see the growth of hard discounters, with some channels moving into Europe.”
But analysts also note that US customers tend to make less of a fuss with higher prices. And for Mondelez in particular, analysts said people basically still love their snacks.
“Snacks are the new staple,” Mizuho analyst John Baumgartner said in a note Wednesday.
More: Kraft-Heinz is raising prices again — here’s when analysts think food inflation could peak
While Baumgartner said he expects consumer demand to slow next year as rising prices siphon more buying power, he said Mondelez and other snack makers could withstand impact better than some of their grocery store peers.
“We expect snacks to largely maintain similar performance to staples and as such, MDLZ’s portfolio appears more attractively positioned relative to its global peers Staples, selling household and personal care, which are more at risk of demand destruction,” he continued.
Not everyone was so optimistic about Mondelez in the short term, largely because of Europe, which accounted for nearly 40% of the company’s sales last year. Business in this region has softened amid negotiations over price increases and broader consumer concerns, potentially offering some reading for other global goods companies looking to charge more.
“Based on our conversations, we suspect that few investors are inclined to pour new money into the stock as winter approaches with MDLZ’s exposure to Europe,” MDLZ said Tuesday. UBS analyst Cody Ross in a research note.
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