Input Cost Inflation: Impact on the Food and Beverage Industry

Current State of Input Costs

Input costs in the food and beverage industry are showing signs of normalization, with companies like PepsiCo focusing on productivity. However, Coca-Cola reports rising agricultural input costs, and Campbell Soup Company notes moderate inflation, particularly in areas like tomatoes, olive oil, and labor, expected to persist through 2024.

"Now that our cost are kind of normalizing, our input cost, and we've all been going at productivity in our case, this has been a very, very strategic focus for us." --- (PEP, earning call, 2024/Q2)

"We still have input costs that are going up, typically, the agricultural ones rather than the metal, or commodity-based ones." --- (KO, earning call, 2024/Q2)

"Through the third quarter, we experienced a moderate amount of input cost inflation, and we expect inflation to continue to moderate throughout the remainder of 2024." --- (CPB, sec filing, 2024/Q3)

"We anticipate core inflation to remain in this range for the balance of fiscal ‘24, and we will stay focused in areas of our portfolio with increased input cost, such as tomatoes, olive oil, cocoa, and other areas of persistent inflation, such as labor costs and warehousing costs." --- (CPB, earning call, 2024/Q3)

Supply Chain Challenges

Companies like Mondelez, Campbell Soup, Kraft Heinz, and General Mills report increased stability and confidence in their supply chains, with efforts to minimize risks and step-up production. PepsiCo highlights initiatives addressing broader food and agriculture value chain challenges, indicating a proactive industry approach to overcoming supply chain issues.

"We also remain confident in our supply chain. Supply chain remains priority one, and we are confident in our supply chain and that of our partners with ongoing work streams to minimize risks." --- (MDLZ, earning call, 2024/Q1)

"Given the strength of our supply chain, we've been able to step-up production to help meet that need which has accelerated growth in this normally stable category." --- (CPB, earning call, 2024/Q3)

"Supply chain in general has been an area that we have a lot more stability." --- (KHC, conference, 2024/06/04)

"And so they had their supply chain issues would be an understatement. And so it's really kind of back to where it was." --- (GIS, conference, 2024/05/29)

"About Farm Foundation Farm Foundation is a 501(c)(3) organization working across the food and ag value chain to build momentum behind meaningful solutions to some of the most important challenges facing farmers and, by extension, our industry as a whole." --- (PEP, press release, 2024/07/24)

Impact on Pricing Strategies

Companies in the food and beverage industry are adopting vigilant and mindful pricing strategies amidst input cost inflation, with no major strategic shifts. They are balancing core pricing and mix effects, managing disruptions, and focusing on value to consumers. Adjustments are surgical, targeting categories most impacted by cost increases.

"So I don't think you'll see a big strategy swing. I think it's really about continuing to fuel what we think is the strength, being a bit more vigilant and mindful about where we need to be on pricing and promo, but nothing that looks out of the realm of historical approaches and programs." --- (CPB, conference, 2024/06/13)

"That's the way we earn the right to take a reasonable level of pricing. Clearly, some of the inflationary effects and some of the mix effects, are likely to become more subdued as we go into the back half of the years. So I'm not expecting, for example in North America, half of it is from mix and half of it is from core pricing." --- (KO, earning call, 2024/Q2)

"We have now landed the last -- the vast majority of pricing in Europe. One customer alliance is still ongoing, which will cause some additional disruption in Q2, but the business remains in line with our expectations." --- (MDLZ, earning call, 2024/Q1)

"So yes, so we don't see any other meaningful change here. And the price that has been taken is very surgical around those categories have been suffering the largest impact." --- (KHC, earning call, 2024/Q1)

"So the most important job we have to do as we think about price and value is on the value side, which is one of the benefits we're bringing to consumers." --- (GIS, conference, 2024/05/29)

Impact on Profit Margins

Higher input cost inflation has led to decreased gross profit margins for companies like Campbell Soup and Kraft Heinz, despite efforts in supply chain productivity and cost savings. While some improvements in gross profit were noted, the overall impact of rising costs remains a significant challenge.

"Gross profit margin decreased due to higher cost inflation and other supply chain costs and the dilutive impact of the acquisition, partially offset by supply chain productivity improvements, favorable net price realization, favorable volume/mix and the benefits of cost savings initiatives." --- (CPB, sec filing, 2024/Q3)

"So we are being also thoughtful of making sure we are protecting the topline, while at the same time, making sure we have the right gross margins management in order for us to make it work within the entire Kraft Heinz portfolio." --- (KHC, earning call, 2024/Q1)

"Gross profit margin increased due to supply chain productivity improvements, favorable volume / mix and the benefit of cost savings initiatives, partially offset by higher cost inflation and other supply chain costs, unfavorable net price realization and the impact of the recent acquisition." --- (CPB, press release, 2024/06/05)

"On a two-year CAGR basis, net sales increased 5%. Gross Profit Gross profit, defined as Net sales less Cost of products sold, increased by $64 million in 2024 from 2023. As a percent of sales, gross profit was 30.9% in 2024 and 30.0% in 2023." --- (CPB, sec filing, 2024/Q3)

"We continue to signal very strong margin expansion and trajectory as well. I know margin improvement in the cost productivity side, what you talked about in the past about optimizing your DSD networks, your manufacturing productivity." --- (CPB, conference, 2024/06/13)

Consumer Behavior and Purchasing Decisions

Consumers are becoming more cautious and selective, willing to spend where they see value (PEP). Lower-income consumers are particularly careful, prompting companies to adapt promotional strategies (MDLZ). Some categories face trade-down pressure (CPB), while others strive to offset cost increases to shield consumers (KHC).

"So do you see different behaviors happening everywhere, I think the connecting line it would be, the consumer is more cautious, the consumer is more choiceful, but the consumer is willing to spend in areas where they see value and we see it in our category, right, the more -- the parts of the category there I was referring to." --- (PEP, earning call, 2024/Q2)

"Mark Clouse: Yeah, I think, part of, interestingly enough, as I said earlier, this kind of staggered approach to consumer behavior, I think we're a lot further down the road as it relates to the Meals & Beverages categories, which arguably we're experiencing a little bit of a trade-down pressure and some of the competitive dynamics that we're seeing now in Snacks we were dealing with a year ago." --- (CPB, earning call, 2024/Q3)

"For those lower income consumers who are buying very carefully and evaluating very carefully when and what and at which price they buy, we will need to become more agile in the promo mechanisms that we will play out." --- (MDLZ, earning call, 2024/Q1)

"So we do that very much intentional in a way for us to make sure we are all doing everything we can to offset things so that consumers don't see it." --- (KHC, earning call, 2024/Q1)

"What are you seeing in terms of consumer behavior that might be driving this?" --- (GIS, conference, 2024/05/29)

Future Outlook and Long-Term Impact

The future outlook for input cost inflation in the food and beverage industry appears less severe than anticipated, with companies like Campbell Soup and PepsiCo expecting reduced intensity and volatility. General Mills anticipates continued high at-home food consumption due to inflation, while PepsiCo and Mondelez focus on affordability and long-term growth strategies.

"But the good news is the intensity of the impact and what I think will likely end up being the duration of impact already is looking like less than what you might have seen in the broader food universe." --- (CPB, conference, 2024/06/13)

"Jeffrey Harmening: Yeah. So let me start with At-Home occasions. At-Home occasions are actually quite high, I mean, about 86% to 87% of food is now eaten at home, and given the challenges consumers are facing with inflation, we would expect that to continue." --- (GIS, earning call, 2024/Q4)

"So can you help us understand beyond the headline financial results that we can see, I guess, evidence of what you look at to ensure you're providing proper levels of affordability for category development to support the very long-term for that business?" --- (PEP, earning call, 2024/Q1)

"Despite facing a challenging and dynamic operating environment, our teams remained focused and agile in executing against our long-term growth strategy. https://t.co/qci1c0Gobs" --- (MDLZ, Twitter, 2024/04/30)

"And so outlook Q2 through Q4, so relatively benign inflation and not a lot of volatility in the rate of inflation quarter-to-quarter." --- (PEP, earning call, 2024/Q1)