Manufacturing companies will continue increases until they regain profitability
Consumers around the world will pay even more at supermarkets and grocery stores this year than in 2022, according to retail groups, consumer goods companies and investors, unless commodity costs fall or the shift to cheaper products accelerates private label. Retailers and manufacturers of consumer goods have been in tough negotiations for more than a year now, with friction starting in 2021 over supply chain disruptions due to the coronavirus. This has since turned into an ongoing war over the high cost of raw materials and energy in the wake of Russia's invasion of Ukraine. And rising prices of basic foods from bread to milk and meat are exacerbating the cost of living crisis in Europe. Britons paid 16.7% more for food in the four weeks to January 22 compared to the same period last year, according to research firm Kantar.
The US food index, including meals eaten at home and in cafes and restaurants, is set to grow by an incredible 10.4% for 2022. Mark Snyder, CEO of the world's largest food group, Nestle, said last week in a German newspaper that it will have to raise food prices further this year to compensate for higher production costs, which have not yet been fully passed on to consumers. “Investors will pay a premium for companies that show in their portfolio that they can be priced without negatively impacting volumes and market share,” said Jack Martin, fund manager at Oberon Investments.
The big profit margins of packaged goods companies have been squeezed by higher input costs for more than a year, as prices of ingredients such as wheat and sunflower oil have soared since the start of the war in Ukraine last February. Unilever, which was expected to report full-year results yesterday, said in October that its underlying price growth, which is calculated as a price index, strengthened to a record 12.5% in the third quarter of 2022. Nestle and the dairy giant of Danone products are due to announce results later this month. According to Tineke Fricke, portfolio manager at investment firm Waverton Investment Management, Unilever will raise prices in 2023, albeit selectively. “It has been clear from her previous statements that she prefers to sell fewer products at higher prices, keep prices below those of competitors and gain market share,” Mr Fricke said.
And the analyst of the industry Bruno Montaigne, at Bernstein, stressed that the production companies will continue to raise prices until they regain their profitability. “The only thing that can stop this trend is consumers switching to private label items at a faster rate, so if raw material prices continue to fall, then there may not be a need for more price increases.” Finally, in December, the CEO of Walmart, the world's largest retailer, warned that some “packaged goods suppliers continue to show us that inflation will surge further in 2023 beyond this year's double-digit average.”