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Inflation and Consumer Demand: Their Impact on the Food Industry

September 19, 2024

Note: We reveal investment insights through the quotes of top business leaders.

Key Takeaways

  • Inflation continues to shape consumer behavior, leading to a cautious, price-sensitive market where essentials are prioritized over discretionary items.
  • Food companies are adopting balanced pricing strategies to navigate inflation while maintaining affordability, with some focusing on innovation and marketing to drive growth.
  • Supply chain resilience is critical, with companies implementing long-term agreements and efficiency improvements to mitigate past disruptions.
  • Future outlooks for the food industry remain optimistic, driven by investments in sustainability and organic initiatives, despite ongoing commodity price challenges.
  • Government policies and market dynamics significantly influence food prices, affecting both supply chains and consumer demand.

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Current inflation trends are significantly impacting food prices, with companies noting a cautious, price-sensitive consumer prioritizing essentials over discretionary items. While food inflation is easing, broader economic pressures persist, affecting sales volumes and consumer behavior in the food industry.

"The updated net sales guidance reflects an ongoing dynamic consumer environment driven by inflationary pressures and diminished discretionary income affecting the dog snacks and sweet baked goods categories, and the anticipated impacts of elasticity of demand within our coffee portfolio due to additional pricing actions as a result of higher than expected green coffee costs, partially offset by increased expectations for Uncrustables® sandwiches." --- (SJM, press release, 2024/08/28)

"Actually food inflation is actually coming down. But if you look at the broader macroeconomic environment, we're still seeing inflation of 3% to 4% in the broader environment." --- (GIS, earning call, 2024/Q4)

"We expect consumer trends to continue to evolve and our volumes to improve over time, however, economic pressures on consumers, including the challenges of high inflation, may continue to negatively impact our volumes throughout fiscal 2024." --- (CAG, sec filing, 2024/Q3)

"Now as the economy improves, if it does improve, if discretionary income keeps growing faster than inflation, you'll likely see a return to kind of the pre-inflationary times as people become a little bit more comfortable." --- (K, earning call, 2024/Q1)

"Now, the inflation impact coupled with historically low savings rates has created a more cautious, price sensitive consumer, and we’re also seeing a cautious consumer prioritize essential staples over discretionary categories." --- (TSN, earning call, 2024/Q2)

Consumer spending and preferences amid inflation

Amid inflation, consumer spending is influenced by economic uncertainty and rising food prices. Retailers like Target and Walmart note heightened consumer concerns, while Costco reports stable food inflation. Kroger highlights increased basket values despite fewer items purchased, reflecting changing consumer preferences in the food industry.

"And even as inflation moderates and we see sequential improvement in discretionary category trends, higher interest rates, uncertainty around the future of the economy, continued social and political divisiveness and the upcoming election cycle have consumers concerned about what lies ahead." --- (TGT, earning call, 2025/Q1)

"Consumer groups have raised concerns about potential food price increases at a time when people are already struggling with inflation and high interest rates." --- (WMT, press release, 2024/07/26)

"During 2022, we faced a number of challenges. We saw prominent macroeconomic headwinds as the world adjusted to life post COVID, including the highest levels of inflation we've seen in Amazon's history and an overall uncertain consumer environment." --- (AMZN, event transcript, 2024/05/22)

"On the inflation front, it's more of the same from last quarter. Across all core merchandise, inflation was essentially flat in Q3, with fresh foods close to zero and slight inflation in food and sundries being offset by some deflation in non-foods." --- (COST, earning call, 2024/Q3)

"Identical sales, excluding fuel, for 2022, compared to 2021, increased primarily due to an increase in the number of households shopping with us and an increase in basket value due to retail inflation, partially offset by a reduction in the number of items in basket and the termination of our agreement with Express Scripts." --- (KR, sec filing, 2023/Q4)

Pricing strategies of food companies

Food companies are adopting balanced pricing strategies to navigate inflation and supply chain improvements. Mondelez emphasizes new price points and cocoa coverage, while PepsiCo focuses on maintaining affordability alongside margin expansion. Additionally, ADM's capacity increases suggest pricing adjustments based on production efficiencies and demand.

"And I think you're going to see going forward a much more balanced strategy in terms of what price point we are going to cover, particularly in the U. S. And again, given the much better supply chain we have these days, we're going to hit the market with these new packs and price points fairly soon." --- (MDLZ, conference, 2024/06/13)

"It's important to remember that although managing price gaps is important, growing our elevated snacks brands will be more influenced by the impact of our innovation and marketing efforts. Those plans are particularly" --- (CPB, earning call, 2024/Q2)

"We look at that very carefully. Now why are our margins expanding internationally because as we gain scale and obviously, that our fixed cost leverage is much better, and that's how we're getting to more profitable businesses in international markets, especially the large markets, whilst we keep affordability at the center of our strategy because that's long-term, including other things that we do, obviously, with availability and with innovation." --- (PEP, earning call, 2024/Q1)

"We have delivered 7% year-to-date volume expansion across our BioSolutions platform, increased starch capacity in our Marshall, Minnesota facility to meet growing demand from food, beverage, and industrial customers, and in a milestone for our strategic partnership, Solugen recently broke ground on a 500,000 square foot biomanufacturing facility that will use ADM source dextrose for applications in water treatment, agriculture, energy, and home and personal care.Within our productivity agenda, the drive for execution excellence is continuing to deliver simplification and cost-saving opportunities across the enterprise." --- (ADM, earning call, 2024/02/02)

"We are confident in our Chocolate business for four main reasons: our cocoa coverage strategies, our approach to pricing, our supply chain, and our iconic brands." --- (MDLZ, earning call, 2024/Q1)

Supply chain challenges in the food industry

Supply chain challenges in the food industry are being addressed through various strategies. Walmart emphasizes resilience via long-term supplier agreements, while ConAgra acknowledges past issues like recalls affecting profitability. Sysco aims to restore productivity to pre-pandemic levels, and Tyson Foods focuses on waste elimination to enhance efficiency.

"And so we're really proud of our position from a supply chain standpoint. We worked diligently to provide resilience across the food supply chain over the past couple of years. I'm working on a number of initiatives, Doug, things like long term agreements with our suppliers to make sure that they can make the investments they need to secure future food supply, working diligently in things like sustainability across the key stakeholder groups to equip farmers to make sure that our food supply is steady for years to come." --- (WMT, event transcript, 2024/06/05)

"The fact of the matter is, is that if you look at a year ago, we had a lot of -- we still had a lot of things going on in supply chain with some recalls and some other challenges that we had that did impact the profitability." --- (CAG, earning call, 2024/Q1)

""We look forward to supporting Whole Foods Market and remain firmly committed to working together to serve the evolving needs of their consumers. UNFI plays an important role in our supply chain as we continue to grow and serve more customers," said David Garraway, Vice President Supply Chain for Whole Foods Market." --- (UNFI, press release, 2024/05/21)

"Overall supply chain productivity, again, we're pleased with the progress we're making week over week, quarter over quarter, year over year. We need to get back to 2019 levels of productivity and we are baking in that productivity improvement into our long range financial plan that we'll talk about with you today. And last but not" --- (SYY, event transcript, 2024/05/22)

"What I'm describing to you is a new opportunity and a new waste being eliminated from our system, all through supply chain in terms of where we manufacture, what is the capacity utilization, the yields, the labors, all those things you would see in a typically commodity oriented business." --- (TSN, conference, 2024/05/15)

Impact of inflation on food purchasing decisions

Inflation is influencing food purchasing decisions significantly. Companies like Sprouts Farmers Market and Costco are adjusting their strategies based on price changes, while Walmart notes modest food inflation. Target is proactively lowering prices on essential items to attract consumers, reflecting a direct response to inflationary pressures.

"Impact of Inflation and Deflation Inflation and deflation in the prices of food and other products we sell may periodically affect our sales, gross profit and gross margin." --- (SFM, sec filing, 2024/Q2)

"And it may be in an area that if fresh foods is seeing some price inflation, we may invest more in the fresh foods departments for that period of time." --- (COST, earning call, 2024/Q3)

"So food is up modestly in terms of inflation, consumables is about flat and general merchandise is down." --- (WMT, conference, 2024/06/12)

"Shoppers will enjoy lower prices on food, beverages and household essentials MINNEAPOLIS, May 20, 2024 /PRNewswire/ -- Target Corporation (NYSE:TGT) announced today it will lower everyday regular prices on approximately 5,000 frequently shopped items across its assortment.1 The retailer has just reduced prices on about 1,500 items, with thousands more price cuts planned to take effect over the course of the summer." --- (TGT, press release, 2024/05/20)

"Our cash flow projections look several years into the future and include assumptions on variables such as inflation, the economy and market competition." --- (KR, sec filing, 2023/Q4)

Future outlook for the food industry

The future outlook for the food industry appears positive, with companies like ADM anticipating improved demand for soy meal, Mondelēz investing in organic initiatives, and General Mills focusing on sustainability. However, challenges remain, particularly regarding commodity prices, as highlighted by PepsiCo's margin outlook concerns.

"Maybe first, as we think about the outlook for the year where you talked about improvement in soy meal demand and inclusion ratios later in the year." --- (ADM, earning call, 2024/Q1)

"As part of Mondelēz International, we are proud to invest in organic food and farming initiatives as we continue to lead the future of snacking. CLIF BAR believes organic can be a catalyst for good." --- (MDLZ, press release, 2024/05/15)

"Turning now to our financial guidance for fiscal ’25 on Slide 23. Again, our outlook anticipates both continued investment in our brands and a gradual waning of the challenging macro trends experienced by the industry in fiscal ’24 as consumers continue to establish new reference prices." --- (CAG, earning call, 2024/Q4)

"Our Climate Transition Action Plan and continued progress demonstrate how we are working from the ground up, with partners across our value chain and industry, to help solve today's food and agriculture challenges and build a resilient future. Additional Planet progress in fiscal 2023 includes: Advancing regenerative agriculture: More than 500,000 acres engaged in General Mills' regenerative agriculture programs – more than halfway to the company's 2030 commitment." --- (GIS, press release, 2024/04/18)

"And then a clarification for Jamie, on the margin outlook. On the prepared remarks, you mentioned a more benign commodities environment, but that has recently changed in particular, for oil and looking at DSD." --- (PEP, earning call, 2024/Q1)

Role of government policies on food prices

Government policies significantly influence food prices by affecting supply chains and consumer demand. Factors such as agricultural regulations and sustainability initiatives drive price volatility and shape market dynamics, as seen in the coffee and crop sectors.

"We source green coffee from more than 20 coffee-producing countries. Its price is subject to high volatility due to factors such as weather, global supply and demand, product scarcity, plant disease, investor speculation, geopolitical conflicts (including the ongoing conflicts between Russia and Ukraine and Israel and Hamas), changes in governmental agricultural and energy policies and regulation, and political and economic conditions in the source countries." --- (SJM, sec filing, 2024/Q4)

"Expanding Value Creation for Farmers, Grain Buyers and End Customers The demand for sustainably produced crops is increasing steadily, driven by consumer preferences, corporate commitments and initiatives, and public policy." --- (ADM, press release, 2024/08/19)

Long-term consumer behavior changes post-inflation

Post-inflation, consumer behavior has shifted towards seeking lower-priced essentials and faster shopping options. Companies like Walmart and Amazon are adapting by offering flexible services and focusing on affordable products, while Kroger emphasizes loyalty through personalized promotions. Target notes that prolonged inflation has significantly influenced these purchasing habits.

"As Brian highlighted earlier, we take a long-term approach when making investments in our business with a focus on delighting consumers and our guests both today and in the years ahead." --- (TGT, earning call, 2025/Q1)

"And when I said demand, I mean less than three hours. That has grown at a very high rate over the last few quarters than this last year and so the flexibility that the team has been able to offer to customers whether it's in the store, at the curb, delivery, or with Plus, or in this on-demand channel, which is really fast, in many cases, it's less than an hour for the full store assortment across the country, has been great." --- (WMT, earning call, 2025/Q2)

"By maintaining our long-term commitment to lower prices, through personalized promotions and rewards, we are increasing customer visits and growing loyal households through the strength of our retail business, continuing our evolution into a more diverse business, and our value creation model is providing us multiple ways to drive sustainable future growth." --- (KR, sec filing, 2023/Q4)

"And -- so it's -- lower ASP products are more of the mix right now. And we like that because, again, our speed allows us to deliver, especially everyday essentials, quickly, and we'd like to be in the consideration set for consumers on those items. We're not going to quantify Kuiper today, but thank you for your question." --- (AMZN, earning call, 2024/Q2)

"And as Brian shared in his prepared remarks, it is even more important during this time of 3 years of cumulative inflation in these categories." --- (TGT, earning call, 2025/Q1)

See also