Are food companies raising prices to offset the higher costs required to make and sell their products, or are they leveraging the broader narrative of inflation to raise prices and increase profits?
Yes and yes.
A Star Tribune analysis of 20 publicly traded food and beverage companies found that one-third reported quarterly profit margins last year that were well above their 10-year averages. The rest have kept their margins relatively stable, and some are even seeing them shrink.
“This doesn’t mean profits are bad. But companies must be aware that they’re in a unique time and place for customer relationships,” said Mark Bergen, a pricing expert and professor of marketing at the Carlson School of Management at the University of Minnesota. “Would customers be angry if they found out you did this?”
Inflation is real, and the cost of doing business has risen in nearly every category over the past year. Labor, shipping, packaging and raw materials are more expensive and will continue to rise for several more months in most cases.
But Bergen and others say the problem is proportionality.
“As a business, you can empower or leverage your customers to better navigate inflation,” Bergen said. Said. “It’s one thing to linger on luxury things, another thing to ponder over necessities.”
Higher consumer food prices began hitting the shelves in waves last year and are expected to rise in 2022. According to the U.S. Bureau of Labor Statistics, the average cost shoppers pay for meals at home was 8.6% higher in February than a year earlier.
Meanwhile, the costs companies pay to make, package and ship food rose 13% in February. This mismatch indicates that price increases have yet to reach their peak.
“This is happening everywhere – every small firm, every local firm, they all have to raise prices to keep their business afloat,” Bergen said. “Inflation in the food industry will be significant and will continue for a while.”
In addition to direct price increases, Bergen said consumers can expect fewer discounts and smaller pack sizes.
Many factors affect a company’s profitability. General Mills is raising prices and saw profits increase in its last quarter, but the company attributed the increase to a lower tax rate.
Supply chain issues are also delaying product arrivals on the shelves and offsetting the benefits companies see from price increases. That has been the case lately for Kraft Heinz, which didn’t have enough containers to meet demand for Philadelphia Cream Cheese at the end of 2021.
Yet pricing and promotion is one of the areas where businesses have the most control over how much money they make. And consumers are giving them much more room to raise prices than in recent years.
“Firms have better pricing power because of higher household inflation expectations,” said Michael Weber, a professor at the University of Chicago Booth School of Business. “When inflation expectations are high, businesses are more likely to survive cost increases.”
Shoppers can offset high grocery bills by “shopping” from known brands, using coupons, and keeping an eye on sales. But Weber said low-income shoppers already do this, giving them little flexibility in-store and forcing them to spend less at restaurants and elsewhere.
“Low-income households may see higher inflation rates because they can’t lower it any further,” Weber said.
Consumer advocates say the cause and effect of inflation in food prices is “the system that works as designed.”
“Corporate profits are at record levels, and more importantly, corporate profit margins are at their highest point since 1950,” said Rakeen Mabud, chief economist and director of policy and research at the Progressive Groundwork Collaborative. “Overall what we see is companies taking advantage of this moment and raising prices beyond what the input costs would justify.”
Take a look at how recent profit margins across nine companies compare to their 10-year averages. The profit margin for each company is calculated by dividing net revenue by total revenue.
Prices rise, profits rise: A few companies have seen recent profit margins see them exceed their average over the past decade, suggesting that price increases may go beyond what is needed to recoup costs.
“Right now the question is, ‘Can you raise the prices?’ but ‘Will you do it and how much?'” Bergen said.
Prices rose, profits steady: A handful of companies have managed to increase prices while keeping profit margins relatively stable. Strong demand continues to drive sales from food and beverage companies, but pricing experts say companies must raise prices to keep their business as costs rise and remain high.
Prices rise, profits fall: Despite price increases to offset rising costs of raw materials, transportation, labor and other inputs, some companies have seen profit margins fall in recent months. These companies will likely continue to raise prices to catch up with inflation.
Graphics: Brooks Johnson and CJ Sinner, Star Tribune