Confident consumers have swallowed higher supermarket prices so far this year, but the risk of indigestion is growing. For companies that make staple goods, asking for more money is delicate.
On Wednesday, the world’s biggest food company
said sales increased by an impressive 6.5% in the third quarter compared with the same period last year. Demand for its products is strong and Nestlé has been able to pass on the higher cost of inputs such as plastic and transport to shoppers, a sign of healthy pricing power. The company’s shares were up 3% in early trading.
Nestlé’s costs of goods sold will increase by around 4% this year, meaning it will shell out an extra 1.8 billion Swiss Francs, equivalent to $1.95 billion, on everything from packaging to trucking. Dannon yogurt-maker
said Tuesday that its input costs will be 8% higher this year. The difference can probably be explained by what the two companies sell. Nestlé has a big coffee business where hedges have protected it from spiraling commodity costs, although these will roll off soon.
Inflation is now so hot that staples companies feel they have no option but to pass it on. Nestlé, Danone and
Procter & Gamble
all said this week that consumers can expect higher bills at the grocery store. The question is how far they can push before shoppers defect to cheaper brands or buy fewer items.
As a rule of thumb, price increases above 5% are harder to implement without changing buying patterns, according to supermarket and consumer goods executives. There are caveats: Companies that make more premium brands, such as Nestlé’s Nespresso coffee, have extra wiggle room. And consumers are less reactive to price changes in some countries than in others.
Still, food inflation is approaching more sensitive levels in the U.S., where prices for food consumed in the home increased 4.5% in September compared with the same month of 2020. In the euro area, prices for food, tobacco and alcohol were just 2% higher, according to Eurostat. One reason why store prices haven’t risen as much in Europe is because negotiations between manufacturers and grocers happen later there. Nestlé recently increased prices by 5% in the U.S., but is still in negotiations with supermarkets on the other side of the Atlantic. Europeans can expect to pay more from the beginning of next year.
Staples companies have ways to shield shoppers from the full impact of rising commodity costs, by running their factories more efficiently, for example. Consumers have also accumulated savings during the pandemic so may be willing for now to pay more than they usually would. But bosses at consumer goods manufacturers expect more inflation in their cost base next year. Shoppers’ brand loyalty will be tested.
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