Input Cost Inflation: Impact on the Food Industry

Current State of Input Costs

Input costs in the food industry are normalizing for some companies like PepsiCo, while others like Coca-Cola still face rising agricultural costs. Campbell Soup Company reports moderate inflation, expected to continue moderating. General Mills anticipates input cost inflation of 3-4%, offset by cost savings. Mondelez notes higher raw material costs, mitigated by hedging.

"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)

"The company expects to generate HMM cost savings of roughly 4 to 5 percent of cost of goods sold, which is expected to exceed its anticipated input cost inflation of 3 to 4 percent of cost of goods sold." --- (GIS, press release, 2024/06/26)

"The increase in input costs was driven by higher raw material costs net of realized gains from our forward purchasing and hedging contracts, partially offset by lower manufacturing costs driven by productivity." --- (MDLZ, sec filing, 2024/Q1)

Supply Chain Challenges

Supply chain challenges in the food industry are exacerbated by logistical hurdles, labor shortages, and disruptions (ADM). Companies like Walmart are addressing these issues through long-term supplier agreements and sustainability initiatives (WMT). Additionally, efforts to reduce waste and optimize inventory are being implemented by Home Chef (KR).

"Additionally, disruptions in the supply chain, including logistical hurdles and labour shortages, further exacerbated the challenges faced by biofuel producers." --- (ADM, press release, 2024/04/05)

"And if that's the case, what's the future opportunity for cost savings and the supply chain if sales remain challenged." --- (SYY, earning call, 2024/Q3)

"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)

"Throughout its supply chain, Home Chef finds opportunities to reduce waste, including forecasting ingredient needs to minimize surplus, collaborating with its culinary team to consolidate ingredients across meals and maximize inventory, and working with external partners that can support waste reduction goals." --- (KR, press release, 2024/04/02)

"We see a meaningful opportunity to streamline our supply chain footprint and drive capital efficiencies beyond what we've already actioned." --- (UNFI, earning call, 2024/Q3)

Impact on Pricing Strategies

Companies in the food industry are mitigating input cost inflation through various pricing strategies. Kraft Heinz employs pricing actions, efficiency gains, and hedging techniques. McCormick & Company uses data-driven approaches to manage price gaps and drive volume growth. Tyson Foods balances different revenue streams and live cattle pricing to navigate cost pressures.

"While these costs have a negative impact on our results of operations, we have taken measures to mitigate the impact of this inflation through pricing actions, efficiency gains, and hedging strategies." --- (KHC, sec filing, 2024/Q1)

"In terms of pricing, we expect the favorable impact related to the wrap of last year's pricing actions, realized primarily in the first quarter to be partially offset by our price gap management investments that will drive volume growth." --- (MKC, earning call, 2024/Q2)

"When you really balance the two revenue streams, the cutout pricing and the drop pricing, and you take that into account with live cattle and where potentially we could see some live cattle pricing going, that really creates the range of outcomes." --- (TSN, earning call, 2024/Q2)

"We manage commodity cost volatility primarily through pricing and risk management strategies including utilizing a range of commodity hedging techniques in an effort to limit the impact of price fluctuations on many of our principal raw materials." --- (KHC, sec filing, 2024/Q1)

"In terms of pricing, we continue to take a surgical and data-driven approach to managing price gaps, and our investments are still expected to impact about 15% of our Americas Consumer segment." --- (MKC, earning call, 2024/Q2)

Impact on Profit Margins

Despite input cost inflation, major food industry players like Campbell Soup, Kellogg, Coca-Cola, PepsiCo, and General Mills have managed to improve or maintain their profit margins through supply chain productivity, cost savings initiatives, strategic investments, scale, and fixed cost leverage.

"Adjusted gross profit margin increased 30 basis points to 31.2% driven by supply chain productivity improvements and the benefit from cost savings initiatives, which combined more than offset higher cost inflation and other supply chain costs, and the impact of the acquisition." --- (CPB, press release, 2024/06/05)

"But as you can see, even without these recast and country mix impacts, we continued a multi-quarter trend of increased gross profit dollars and improvement in our gross profit margin." --- (K, earning call, 2024/Q1)

"Maybe that's why you haven't heard us too much about it. But if you look at our gross margin line and you were to exclude the impact of bottling investments, additions that we took on for strategic reasons and the addition of some of the finished goods businesses, like our margin profile would be in the mid-30s at this stage, our operating margin profile." --- (KO, conference, 2024/06/06)

"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)

"Operating profit margin of 17.3 percent was up 20 basis points. Adjusted operating profit of $3.6 billion increased 4 percent in constant currency, driven by lower compensation and benefits expenses and higher adjusted gross profit dollars, partially offset by higher media expenses." --- (GIS, press release, 2024/06/26)

Changes in Consumer Behavior

Consumers are adjusting their spending patterns, focusing more on value and quality at disruptive prices to stretch their budgets amid high prices. Despite some normalization in spending towards services and entertainment, there is no major shift in behavior specifically due to inflation.

"So I'm going to maybe start going to John David and saying, everybody always wants to know how our consumers feeling generally out there, Any changes in behavior?" --- (WMT, conference, 2024/06/25)

"In addition, business trends continue to reflect a normalization in spending patterns that first emerged more than 2 years ago, a pattern where consumers are remixing their spending back into services and entertainment outside of their homes after curtailing those activities during the pandemic." --- (TGT, earning call, 2025/Q1)

"I think the similar things that we were talking about in prior quarters are continuing to play out, but no major reaction or change in customer behavior as it relates to inflation or price there." --- (SFM, earning call, 2024/Q1)

"And we know that when we can get that value equation right, great quality, at disruptive prices, that's what really helps the consumer, and that's a role that we're proud to play." --- (WMT, event transcript, 2024/06/07)

"While our team is always committed to value, it's particularly important in today's environment as consumers look for ways they can stretch their budgets in the face of suddenly high prices." --- (TGT, earning call, 2025/Q1)

Mitigation Strategies by Companies

Companies are employing various strategies to mitigate input cost inflation. PepsiCo is enhancing e-commerce and direct-to-consumer channels to optimize distribution. Coca-Cola focuses on retaining consumers during tough times, while Mondelez International uses commodity procurement practices to manage price volatility. These approaches aim to sustain growth and manage cost pressures effectively.

"We continue to monitor changes in the retail landscape and seek to identify actions we may take to build our global e-commerce and digital capabilities, such as expanding our direct-to-consumer business, and distribute our products effectively through all existing and emerging channels of trade and potentially mitigate any unfavorable impacts on our future results." --- (PEP, sec filing, 2024/Q1)

"As we look to the future, our all weather strategy remains focused on driving our top line revenue and delivering strong bottom line returns. This approach has proven that we can deliver in many types of markets globally, and I'm confident, notwithstanding the circumstances and the twists and turns that may lie ahead of us, the ability to continue company's sustainable growth. Jennifer?" --- (KO, event transcript, 2024/05/01)

"Our commodity procurement practices are intended to mitigate price volatility and provide visibility to future costs, but also may potentially limit our ability to benefit from possible future price decreases." --- (MDLZ, sec filing, 2024/Q1)

"James Quincey: Yes, so we as from a strategy perspective, have taken the approach over the last number of years, it cannot say even longer, that it's critically important, particularly when times get tougher to try and keep as many consumers in the franchise as possible, rather than trying to re-recruit them at some later stage." --- (KO, earning call, 2024/Q2)

Regulatory and Policy Impacts

Regulatory and policy changes in the food industry create significant uncertainties and risks, impacting areas such as food safety, advertising, and labeling laws. Companies like Coca-Cola, Kellogg, and PepsiCo face unpredictable regulatory environments, while General Mills emphasizes their adaptability to various regulatory conditions.

"CRITICAL ACCOUNTING POLICIES AND ESTIMATES Recoverability of Equity Method Investments and Indefinite-Lived Intangible Assets Our Company faces many uncertainties and risks related to various economic, political and regulatory environments in the countries and territories in which we operate, particularly in developing and emerging markets." --- (KO, sec filing, 2024/Q1)

"of U.S. and foreign economic conditions on items such as interest rates; statutory tax rates; currency conversion and availability; legal and regulatory factors including changes in food safety, advertising and labeling laws and regulations, the ultimate impact of product recalls; business disruption or other losses from war, terrorist acts or political unrest; and the risks and uncertainties described in Item 1A below." --- (K, sec filing, 2024/Q1)

"So the idea that it would have a significant impact on our business one way or the other, I don't think that it will because we've competed in all we've competed with all kinds of regulatory environments." --- (GIS, conference, 2024/05/29)

"Because of this, we cannot predict the scope or form potential taxes, regulations or other limitations on our products or their packaging may take, and therefore cannot predict the impact of such taxes, regulations or limitations on our financial results." --- (PEP, sec filing, 2024/Q2)

"Given growing legal and regulatory risks and consumer trends supporting healthier products, the investor coalition wants to better understand the company's plans in this area." --- (KO, event transcript, 2024/05/01)

Future Outlook and Predictions

Companies in the food industry, such as Campbell Soup, Kellogg's, Mondelez, and Coca-Cola, acknowledge the inherent risks and uncertainties in future predictions. Despite these challenges, they express confidence in their future outlooks, driven by strategic initiatives like network optimization and forecasting consumer demand through various lenses.

"They rely on several assumptions regarding future events and estimates which could be inaccurate and which are inherently subject to risks and uncertainties." --- (CPB, sec filing, 2024/Q3)

"Plus, we continue to address our future margins and return on invested capital, making progress on network optimization projects, all of which gives us increased confidence in the full year guidance we first provided last August and allows us to increase" --- (K, earning call, 2024/Q1)

"Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and to inherent risks and uncertainties, many of which are beyond our control." --- (MDLZ, sec filing, 2024/Q1)

"you kind of forecasting consumer demand maybe through a geographic lens, but also by channel kind of differentiation between kind of future consumption channels, immediate consumption and away from home food service?" --- (KO, conference, 2024/06/06)

"And I do feel really good about that outlook in 2025. And so I think the combination of those, albeit about six months later than we would have liked it to be, but I think then as you cycle through that kind of full swing, that puts you in a position where to see it in the first half of next year." --- (CPB, earning call, 2024/Q3)