Prices Going Up On Oreos, Kraft Mac & Cheese and…

My bet is with “tonethebone”. Wal-Mart is becoming increasingly stronger and they not only have the leverage but are the best ever in using it to get what they need from suppliers. Traditional supermarkets (the department stores of the food business) are too locked into tired formats, shrinking market shares and unimaginative management to exert proper control and influence. That said, supermarkets often are exceedingly price oriented in dealing with vendors and focus on price too frequently at the expense of quality and interesting new products and ideas, so they will exert some control. Inflation is inevitable and will affect the volume/price retailers the most, particularly when they do not give consumers other valid reasons to shop their stores. Of course the smaller stores will pay more ….they always do.

I am sure this was a very difficult decision for Roger and Kraft. He is a sharp guy and being the first to raise prices is not an easy thing to do. Kraft has been struggling for some time now and, with costs/prices going up throughout the value chain, it is no surprise that someone would have to take the lead. And, yes, others will breathe a sigh of relief and most will follow. On the retail side: they too will increase prices and I think even mass and club will take an increase. We are at the point in the economic cycle where everyone needs a little breathing room. Hopefully, we can then put a hold on increases for a while after this round.

This may be an interesting round to watch. On the one hand, if one manufacturer raises prices and then the retailers raise prices and the consumers accept the higher prices and continue to purchase, there will be a lot of people jumping at the opportunity to raise prices. However, if Kraft’s price increase accelerates the demand for lower priced private label brands, manufacturers will be caught in a difficult spot. Those companies that have been switching to a consumer demand, cost efficient business process may be able to compete effectively and accommodate gasoline price increases with small price increases and maintain their competitive position. Companies that have not been using this model have not been able to take advantage of efficiencies yet and do not have a strong competitive position if not using a consumer demand model. They have no choice but to raise prices higher than others, thereby weakening their competitive position. The companies that don’t have to follow Kraft’s lead in the price increase or that don’t have to increase prices as much will have an advantage.

This has been pent up for a long time, and I am sure others will follow, with some relief. Manufacturers have been cutting costs on everything to try to keep prices down. As a result, we’ve been seeing cutbacks in pack size and cheaper ingredients. Even skimping on corrugated has now come home to roost, as master cases are being crushed and damaged at higher levels, and so now this must be addressed, too. But I think this is a tempest in a teapot, at least as far as consumers are concerned. They won’t mind a few pennies increase on their products; they’ve come to expect it. Retailers will try to hold the line, some of them unreasonably so, and they’ll lose out on some of the funny money that gets passed around. Retailers I’ve spoken with say they expect cost increases, but darn well want to see the justification. And if it’s based on a commodity increase, and the commodity later comes down, these retailers will be asking for money back. Nothing much changes here. The usual push-pull in the marketplace, with the attendant angst.

Energy affects everything. Prices have to go up. Efficiency, intense competition and a basic aversion to food price inflation have kept prices below the inflation rate of other commodities for some time.

Food is still cheaper in the U.S. than virtually any place in the world. But an increase is inevitable under the present circumstances. One can only hope that manufacturers keep it real. If, like the oil companies, we start to see extraordinary profit reports in the next quarter or two, inquiries will be made.

Alleged price increases may not be what they seem. For many grocery suppliers, there are 2 prices: everyday and deal. Will the deal pricing rise by the same amount? For many suppliers, the deal volume is major. Furthermore, more and more groceries (both manufactured and unprocessed, such as fresh fruit) are coming from low-wage countries. As the dollar stays strong, due to higher and higher interest rates, items sourced from outside the USA should get less expensive.

This discussion intrigues me. There was a similar cause and effect story put about last week by Manor Bakeries in the UK which blamed its reduced profits/falling sales etc on prices, competition and all the factors that might make consumers think twice about keeping their purses in their pockets. Although I am inclined to agree that these price rises won’t necessarily cause falling sales amongst big fans, I also wonder whether there aren’t other factors (like product ingredients and quality) that might become a consideration. Six months from now, IF sales have fallen, will the price increases be the only significant factor blamed? I’m not convinced that using things like higher fuel prices as an excuse is good enough. This really isn’t a time when prices should be going up.