For US food manufacturers struggling with rising raw-material costs – and fearful of the impact that slapping a higher price on their products could have on sales volumes – the words last week of the chief executive of one of the country’s largest retailers would have provided some reassurance.
Steve Burd, chairman, president and CEO of Safeway Inc, played down the impact that price rises would have on consumer behaviour. The Safeway chief suggested that inflation “may break 2%” in the latter part of the year but seemed unfazed that the retailer would be able to pass these rising costs onto consumers.
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“When inflation gets to 5% you can have a demand-depressing result,” he told analysts as Safeway announced its 2010 financial numbers. “You don’t have a problem at 3%, it’s between 3-5% that consumers start to have a problem.”
North of the border, Maple Leaf Foods CEO Michael McCain became the latest manufacturing boss to insist that his company will look to raise prices to offset commodity costs – and said retailers realise that inflation could benefit their own business.
Bakery-to-meat processor Maple Leaf has already increased some prices and McCain said more hikes were planned. And, although he acknowledged that talks with retailers on price would be “challenging”, he said: “There is an underlying motivation that food inflation is probably for the food retailing industry a friend and not an enemy where possible.”
As you would expect, commodity volatility was a key theme of last week’s CAGNY investment conference in Florida. The annual event – where the bosses of the US’ largest food manufacturers face Wall Street to discuss company performance and the outlook for the industry – saw the likes of ConAgra Foods, Mead Johnson and Heinz among those that flagged the pressure of raw-material costs.
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By GlobalDataConAgra CEO Gary Rodkin, who also announced that the US company had decided to cut its long-term sales target to “reflect the realities of the current marketplace” said inflation had become “very real” and that “rationality” would return to most categories after the recent discounting in sectors like frozen food.
“While not easy, pricing is not a choice,” Rodkin told analysts at CAGNY. “It’s an imperative. We cannot ignore the impact of dramatically increasing input costs on margins.”
Meanwhile, Rodkin’s counterpart at Heinz, Bill Johnson, said rising input costs was the company’s biggest challenge in developed markets and insisted the company would look to price to offset its higher raw-material bill. “I have never regretted raising prices in the face of cost pressure,” he said.
Nonetheless, Johnson did indicate that Heinz, too, feels the uncertainty that commodity volatility can create in even the biggest brand owners. “There is not enough elasticity in anyone’s brands to offset commodity spikes,” he admitted. “The question is how long will it last.”
Of course, commodity pressure is not just felt in the US. Manufacturers the world over are under pressure and are likely to be in some interesting conversations with their retail customers. In France, due to the legislation governing the sector, there are extra considerations to those negotiations. Now everything has to be hammered out at the start of the year. Add the commodity volatility to the often vocal nature of French farmers, suppliers and grocers and the tensions can reach the public domain. Last week, we reported from French farm show SIA, where suppliers and retailers debated the issue of price ahead of the deadline for final agreements – a deadline that ends today.
This week, the news spotlight will switch somewhat to Europe, with retail giants Carrefour and Ahold set to issue their 2010 results. Greencore reportedly has until Wednesday to decide whether to launch a counter-bid for Northern Foods, the UK food maker which which it was set to merge but which is now backing a rival offer from chicken-to-fish group Boparan Holdings.
And today sees the start of Fairtrade Fortnight in the UK, a two-week period that seeks to promote the ethical label to local consumers. With sales breaking the GBP1bn barrier in the UK in 2010, the category has proved somewhat resilient to the downturn. Here, we interview the Fairtrade Foundation’s executive director Harriet Lamb, with the organisation wanting to maintain its campaigning ethos in spite of the category hitting the mainstream.
