Rising prices threaten profit margins of food companies

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The food industry’s profit margins have tightened throughout 2021, and analysts are increasingly concerned that margins may be even tighter as companies absorb more of the persistent rising costs and consumers eventually change their buying habits to adapt.

Albertsons, Mondelez and Kroger are among a wide range of companies whose profits could be reduced by rising food prices if inflation remains high.

So far, grocery stores, restaurants and food producers have passed much of the impact of inflation on to consumers, who have absorbed most of the increase. Industry profit margins have tightened throughout 2021, and analysts are increasingly concerned that margins may be even tighter as companies absorb more of the ever-rising costs and consumers eventually shift. their buying habits to adapt.

Prices for U.S. consumers jumped 6.2% in October from a year earlier, leaving families facing the highest rate of inflation since 1990.

“We are entering this situation where we have runaway inflation,” said Jay Hatfield, CEO of Infrastructure Capital Advisors. “Inflation in one area drives inflation in another.”

Raw material costs have increased in various industries, including food. Wheat prices are at their highest level for 8 years. Sugar prices are at their highest levels in four years, while other staple ingredients, including corn and rice, remain high.

Several major food producers took steps to consolidate their profit margins throughout the year, which mostly returned to normal levels after an exceptional 2020, when the grocery industry was boosted by a more people cooking and eating at home during the worst of the pandemic.

Cheerios maker General Mills told investors in September that it expects prices to rise for the remainder of its fiscal year, which includes part of 2022. Chicago-based Conagra, which manufactures a wide range of foods ranging from Chef Boyardee’s ravioli to Birds Eye frozen vegetables. , also don’t expect inflation to slow down anytime soon.

“Our initial plans for the year included additional inflation justified prices for future periods,” Conagra CEO Sean Connolly told investors last month. “In view of the heightened inflationary environment, however, we now plan to take further steps beyond these initial plans.”

As food producers raise prices, grocers and restaurants are passing the increases on to consumers for the most part, rather than having them eat into their profit margins. This strategy may not work any longer, several analysts have said, if consumers consider cutting back on spending and changing their shopping habits due to persistently high prices. Businesses could then be faced with declining profit margins as more costs are absorbed and consumers potentially reduce spending on home and restaurant meals.

Consumer staples businesses, which include food producers and grocers, have been among the hardest hit by rising inflation. The industry had the most companies, at 63%, reporting lower net profit margins in the third quarter from a year ago, according to FactSet data.

Rising food prices could lead to more price conscious consumers and this could mean that conventional grocers like Kroger face greater margin pressure than their cheaper or more diverse competitors like Dollar General or Walmart, a. CFRA analyst Arun Sundaram said in a note to investors.

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