Can Food Retailers Absorb a Shot of Inflation?

A world that’s getting healthier is also likely to get more expensive.

That’s the expectation based on recent data—and a spate of remarks from both retailers and consumer packaged goods companies as they’ve reviewed financial results over the past few weeks. Nearly all are in agreement that input costs—commodities, transportation and packaging—have stepped up more than expected already this year, with the expectation among some that price inflation could be around for a while as the economy straightens itself out as business absorbs the stresses associated with last year’s COVID lockdowns, and consumers enjoy the effects of financial stimulus and act on pent-up demand.

“The COVID-19 pandemic has caused an unconventional recession, and we do not expect the recovery will be typical either,” Jared Bernstein and Ernie Tedeschi, members of President Joe Biden’s Council of Economic Advisers, wrote in a recent blog post. They argue that the factors influencing inflation now could be “transitory,” but not everyone necessarily agrees.

To hear the CPGs tell it, they have little choice but to raise prices amid rising costs they can’t necessarily hedge, like packaging and transportation fluctuations. Many of them are also lapping heavy sales increases from a year ago. Those prices in turn will pressure retailers to pass along higher prices to consumers, but there’s a limit to how high they can go in this environment as they lap a historic year.

As has become the new normal, the news is unspooling first with toilet paper. The item that sold itself last year needs another Mr. Whipple.

Kimberly-Clark at the end of March said it would implement “mid to high single-digit” list price increases across the majority of its North American business beginning next month, as the maker of Huggies, Kleenex, Cottonelle and Depend brands encounters input pressures, laps the effects of the COVID stock-up a year ago, and absorbs the effects of severe weather in the Southern U.S., which further stressed its supply chain, officials said.

Weeks later, Procter & Gamble officials made a similar pronouncement, forecasting mid to high single-digit hikes in September for its baby care, feminine care and adult incontinence product categories in the U.S. to offset a portion of the impact of rising commodity costs.

Other suppliers in recent weeks signaled a readiness to hike prices as one way to deal with input cost inflation that is turning out to be more intense than they may have anticipated a quarter before. Coca-Cola Chief Financial Officer John Murphy, speaking in an earnings call last month, said the beverage giant was “closely monitoring” rising prices for high fructose corn syrup, and materials for bottles and cans. “I think it is important to highlight that as an overarching principle around the world, we typically look to take pricing in line with inflation,” Murphy told analysts, according to a Sentieo transcript. “And I would expect that principle will continue to be adhered to as we move into the back half of ’21 and even into ’22.”

A few days later, Nestle officials said the company saw “broad-based inflation” across various commodities, packaging materials and transportation.

“We are hedging and forward-buying to cover some of this exposure, but it only delays the impact for a few months,” warned Francois-Xavier Roger, Nestle’s CFO. “And in addition, hedging is mainly available for key agricultural commodities, but it does not really apply for packaging material and transportation whose price fluctuations goes immediately to the P&L. So obviously, the main way to address input cost inflation is through price increases.”

Kraft Heinz officials last week said they anticipated “stronger but manageable” inflation of mid-single digits this year. That also seems to be forecast to be more intense as the year goes on.

Economic figures like the Bureau of Labor Statistics’ Producer Price Index (PPI), which tracks input inflation, are also on the rise and show a widening gap with the accompanying Consumer Price Index (CPI). PPI trends were up in February and again in March and typically have a “lag” effect on CPI by about six months. Karen Short of Barclays described the 610-basis-point gap between those indices as “staggering,” and a coming test for the “essential” retailers that over the course of last year absorbed positive effects of the lockdown.

While a little bit of inflation is generally a good thing for retailers, Short is warning clients that some of them may not have the ability to pass on inflation as pricing gaps between them and peers that saw less benefit last year—like Walmart or Aldi—have subsequently widened to what she called “unsustainable” levels. That was likely on the minds of investors who reacted to Albertsons’ recent quarterly results with a sell.

Like his counterparts in the CPG biz, Albertsons CEO Vivek Sankaran faced a lot of questions about the prospect of rising prices. He said Albertsons could pass along pricing—to a point—noting that demand is still ahead of supply in many categories and the consumer is still relatively healthy.

But if those increasing prices exceed 3% or 4%, “we’re going to have difficult conversations about how much we can accept because we’re not going to pass through all of it.”

The coming months will also test the degree to which the digitization of pricing and promotions follows through on its promise to dampen the effects of rising prices and eroding foot traffic. Finally, Albertsons said it would offset inflation with more productivity—raising its $1 billion cost savings goal by another $500 million by year-end of fiscal 2022, primarily through what might be described as difficult conversations with its regional buying groups that might also result in greater leverage with suppliers. 

“We have 13 supply chains in the company, and we have 13 buying organizations in the company. [We’re] going to change some aspects of that,” he said. “And by changing some aspects of that, we get a lot of leverage, both in the supply chain and the design of the supply chain … making things easier for our supplier partners and in the discussions on how we buy.”