Anxiety about inflation is high. Even as demand roars back, the world’s biggest manufacturers, from The Procter & Gamble Co. to Nestle SA, are seeing the cost of raw materials, whether chemicals or coffee, soar.
Unilever Plc warned of commodity and shipping costs increasing the most in a decade. Oil and plastics are a headache for Nurofen-maker Reckitt Benckiser Group Plc, while pricier aluminum threatens a nasty hangover at the world’s biggest brewer Anheuser-Busch InBev NV. Walmart Inc. and Target Corp. may highlight the price demands of their big suppliers when they update on trading in a few weeks’ time.
But although input costs might be hurting profit margins right now, inflation isn’t all bad for consumer groups and food retailers over the long run — especially since there is a good chance that shoppers will pay for them.
Consistent but modest inflation gets shoppers used to price rises, which is good for manufacturers’ margins, says Bloomberg Intelligence analyst Duncan Fox. For grocers, when food prices are accelerating, they have to sell fewer cans of beans or loaves of bread to reach the same value of sales. So long as they keep volumes stable, sales automatically rise. Kroger Co. Chief Executive Officer Rodney McMullen even told investors last month that “a little bit of inflation” is always good for the U.S. supermarket.
The problem is, the cost increases, not to mention rising labor expenses amid worker shortages on both sides of the Atlantic, are neither gradual nor consistent right now.
In the U.S. and Europe, there will be a lag before manufacturers pass them onto retailers, as Unilever noted. The maker of Dove moisturizer and Magnum ice cream knows that it can suffer when the two sides don’t see eye to eye. A price spat with Tesco in 2016 saw jars of Marmite removed from shelves.
Supermarkets are no doubt keen for consumer goods groups to bear more of the pain. The big manufacturers’ margins — even with the pressure from more expensive commodities and freight — are still much fatter than the grocers’.
But makers of the most popular brands have a good chance of getting supermarkets to pick up the tab on higher costs. Ultimately, those stores will simply raise the prices on the shelves, so it’ll be shoppers who pay the final bill.
Despite “Marmitegate,” as it became known, Unilever is probably in a strong position, as is Procter & Gamble, whose brands range from Oral B toothpaste to SK-II face cream. Nestle has lifted the proportion of premium products it makes, such as Nespresso coffee capsules and Purina pet care, to a third of its total sales, from 11% in 2012. It’s easier to push through increases on those higher-end goods.
When it comes to retailers, those with the most scale — think Walmart and Kroger in the U.S., and Tesco in the U.K. — are in the best position to stand their ground.
Unilever and Tesco eventually called a truce on Marmitegate. If any tussles break out this time round, retailers and producers will most likely find a way to work together. Each side may be more confident that shoppers will pay up. On both sides of the Atlantic, many consumers are in a better place than they were in the wake of the financial crisis or the Brexit vote.
Nestle on Thursday said it was already managing to put through price increases, and they may step up by about 2% in the second half of this year. There could be more leeway still, as Kroger said customers don’t balk at inflation of 3-4%.
But it’s when prices spike higher that manufacturers and retailers have to worry. Not all consumers are flush with cash. Trading down is the big danger: Those under pressure may switch out of brands, such as Kellogg’s cornflakes and Pampers diapers, into cheaper own-label options.
Then there are the German discounters Aldi and Lidl, which sell mostly private-label goods, to contend with. Food retailers must strike a delicate balance between passing on increases, and preventing an exodus of customers to these highly effective rivals.
The no-frills supermarkets won over U.K. shoppers when prices rose 10 years ago. Now they have the U.S. grocers in their sights. Aldi has 2,100 stores in 37 states. Lidl entered the market in 2017, and has only 160 stores. But given that its parent Schwarz Group is Europe’s largest food retailer, it’s unlikely to stop there.
As the virus took hold, some consumers avoided the value chains because of their smaller stores and limited product ranges. But as the post-pandemic recovery drives prices higher, savvy shoppers may fall into their arms once more.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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