JHE WALKS for packaged foods is competitive, where one company’s price increases risk driving buyers into the arms of rivals. Companies in the sector are coping with soaring costs by hedging against spikes in commodity markets by using futures contracts, reformulating products to contain less of the most expensive foodstuffs or, failing that, by surreptitiously reducing packaging while keeping the same ticket price.
Amid pandemic-related supply chain bottlenecks, labor shortages and crop failures, food companies have done all of this repeatedly. However, they had to raise prices, often less sensibly than ideal (see previous article). The invasion of Ukraine, known as the breadbasket of Europe thanks to the richness of its soil, by Russia, the world‘s leading exporter of wheat, once again strengthened their hand. Together, the two countries account for 29% of international wheat sales and nearly 80% of sunflower oil sales. Disruptions to these critical supplies are driving up costs for food businesses, just as energy costs are also exorbitant due to war.
It will be more difficult for European food companies to pass on price increases to consumers than for American companies. Supermarkets in Europe are more concentrated than in the United States and are more difficult to negotiate with suppliers. Walmart, the largest in the United States, controls 17% of the domestic market. Its British and German counterparts, Tesco and Edeka, hold almost 30% of theirs respectively. Moreover, price-conscious Europeans buy more from discounters like Aldi or Lidl. They are also less picky about branded products than Americans and buy retailer brands more.
On March 23, General Mills, the American maker of Cheerios and Wheaties, among other sweet products, reported healthy margins and higher quarterly sales than in the same period in 2019, before the pandemic (although stable compared to the ‘last year). The company insisted that demand for packaged food is expected to remain strong year-round as many people continue to work from home at least some of the time. The strong appetite for its products will allow it, the company says, to raise prices to offset rising raw material costs.
Maybe that’s optimistic. Buyers’ patience with inflation is running out on both sides of the Atlantic. Investors expect margins to tighten. Share prices of major US, European and Chinese food companies fell after Russian tanks rolled into Ukrainian fields on February 24 (see chart). ■
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This article appeared in the Business section of the print edition under the headline “Food fight”