National Opinions

OPINION: Big, painful grocery bills are here to stay

Unless you’re Taylor Swift, you’ve probably noticed the price of eggs has increased dramatically. And, unless you’re Taylor Swift, you’ll be sad to know that your grocery bill won’t go down much this year whatever the headlines say about moderating price pressures. In fact, save a consumer revolt, the inflation of the past two years has created a new, higher price floor.

Companies that supply grocery stores including PepsiCo, Coca-Cola, Kellogg and Unilever initially raised prices to offset increased costs after the war in Ukraine drove up commodities like wheat and energy; and a severe outbreak of avian flu created an egg shortage. Despite widespread complaints, grocery shoppers have broadly been able to handle food inflation, giving companies little reason to peel back prices.

Kellogg attributed its double-digit sales jump last year in part to pricing and Unilever saw revenue expand for the same reason even though volumes fell. Still, executives at branded manufacturers say they haven’t yet fully repaired margins (read: more price increases will likely follow), ignoring the fact that they just delivered the best sales growth in roughly a decade, as my Bloomberg Opinion colleague Andrea Felsted recently noted.

The weird thing is that global food commodity prices have actually been decreasing. The United Nations’ FAO food price index fell for a 10th straight month in January, its longest declining streak in at least 33 years. It’s now 18% below an all-time peak in March 2022 following Russia’s invasion of Ukraine. In line with that impulse, producer prices for finished foods dropped 1% month over month in January, while they continued to rise for consumers (albeit at a slower pace), according to the Bureau of Labor Statistics. Shoppers are now seeing more inflation at the register than food companies and retailers are experiencing.

That makes some sense. The supply chain that puts our breakfast and dinner on the table is complicated. The food we buy passes through many company hands before it gets to us, with each step adding costs. The largest chunk of every dollar spent on groceries goes to companies that process, pack, distribute, and sell food. Those pieces of the supply chain account for about 65 cents of every dollar spent on food, with farm production costs making up a much smaller share, according to a September study by the Kansas City Federal Reserve. All that suggests that declines in commodity prices will have little impact on our food bill.

So why did suppliers and grocery companies raise prices then? Groceries are a low margin business, where volumes make up for the slim profits on each sale. Food suppliers such as Unilever and Kellogg fare better. But along with grocery businesses like Publix and Kroger, the companies are all very sensitive to price shifts. Over the past few years of economic whiplash and labor shortages, some suppliers saw their margins squeezed despite shrinkflation and outright price increases. For example, Unilever told investors this month that its price coverage sits at about 75% of inflated materials, production and logistics costs. On the grocery side, Albertsons and Kroger saw their profit margins tank before they began charging more.

And what goes up rarely comes down in the grocery business. Hershey Chief Executive Office Michele Buck said this month that there haven’t been any moves to roll back prices among food and beverage companies. Historically, she said, prices tend to “stick in the marketplace as a matter of principle.” No wonder Hershey’s stock price is sticking near record highs, while a Bloomberg index of U.S. packaged food companies far outstripped returns on the S&P 500 in the past year.

ADVERTISEMENT

Food suppliers are also in a position of power to keep prices up as people still haven’t returned to pre-pandemic levels of eating out or grabbing takeout. Grocery stores struggle to negotiate lower prices if they don’t have a slate of lower-cost private brands that can take share away from large suppliers. A small regional grocer in the Southwest doesn’t really have the clout to demand a multinational company like Nestlé lower prices. Nestlé can simply walk, leaving the grocer with gaps on its shelves.

Still, large grocery companies are starting to push back, threatening to stop orders or demote goods to the bottom shelf. Walmart reportedly told packaged goods suppliers this month that it won’t take any more price increases. Whole Foods asked suppliers at a virtual summit to lower prices. But these negotiations may simply hold prices steady, rather than lower costs for shoppers.

So far, there has been little consumer resistance to higher prices. Unilever, which produces Ben & Jerry’s ice cream and Hellman’s mayonnaise, saw a small dent in volumes, but not enough to offset the beneficial impact of higher prices. Tyson Foods Chief Financial Officer John Tyson said in November that the company’s pricing actions not only offset higher input costs but “led to higher sales during the year.” I suppose it’s hard to replace those Jimmy Dean breakfast sandwiches.

That may change as Federal Reserve interest-rate hikes work their way through the economy, constraining wallets. On top of that, millions of Americans will lose pandemic-related emergency allotments of the Supplemental Nutrition Assistance Program at the end of this month. Walmart, for example, is one of the largest vendors for food stamps and could see sales hit as so many people contend with tighter grocery budgets come March. Food insecurity that’s been on the rise for months will almost certainly worsen.

For now, robust consumer spending is giving companies little reason to pass any deflation on to shoppers. Whether she knows it or not, Taylor Swift will need to stomach high grocery bills with the rest of us. And for some, the solution will be an empty stomach.

Leticia Miranda is a Bloomberg Opinion columnist covering consumer goods and the retail industry. She was previously a business reporter at NBC News and a retail reporter at BuzzFeed News. This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

The views expressed here are the writer’s and are not necessarily endorsed by the Anchorage Daily News, which welcomes a broad range of viewpoints. To submit a piece for consideration, email commentary(at)adn.com. Send submissions shorter than 200 words to letters@adn.com or click here to submit via any web browser. Read our full guidelines for letters and commentaries here.

ADVERTISEMENT