This is the best article I saw in recent days relevant to CPG companies — Just Food described how consumer behavior will likely change in response to sharp inflation in food prices. The good news for CPG companies is that history shows that consumers will cut back on eating out at restaurants (first trading down from higher-end restaurants to midrange and then to fast food restaurants) before cutting back on grocery purchases. Therefore, the trading down from national CPG brands to private label brands will likely represent a secondary phase of consumers’ response to inflation after consumers have already engaged in more obvious ways to cut back, which may be a reason why most of the large CPG companies have not (yet?) reported a market share loss to private label brands.
Here are some other takeaways from the excellent Just Food article:
- Large CPG companies are in a stronger position to pass through higher costs to retailers than smaller, niche and artisanal products that are characterized by much lower volume and premium prices.
- Product offerings have gotten far stronger the past few years in the category of dairy alternatives. Now is an opportune time for consumers to switch given the record inflation in dairy prices (e.g., butter prices up 12%), which may worsen as ranchers sell off their herds in response to higher beef prices.
- Companies producing meat alternatives (i.e., Impossible Foods) are willing to sacrifice margin for shelf space as they prioritize gaining market share.
- Amid rates of inflation in meat prices (which exceed 20% in most categories), beef is likely to lose market share to less costly protein sources, such as chicken and pork.
- CPG companies have stepped up their capital investment in automation amid surging CPG demand and the labor shortage. That has pushed up prices for the capital equipment required to automate consumer goods production.
Last week, data was added to SONAR that is highly relevant for any companies importing or exporting goods in containers. The three different datasets, which are supplied to FreightWaves from project44, are:
- Ocean container dwell time, which measures the number of days that containers are held at either the port of lading (port where the container is being exported), the port of transshipment or the port of discharge (the port where the container is being imported).
- Ocean container rollover index, which measures the portion of containers that, rather than departing on their scheduled vessel, are “rolled” to a subsequent sailing.
- Ocean container port pair delays, which shows the average number of days between scheduled and actual vessel arrival dates on specific trade lanes.
Within those datasets, I’ll be closely watching the dense trade lanes between China and the U.S. The average delay for containers traveling between China and LA/Long Beach is currently 13-15 days versus just one day in 2019 and early 2020.
On top of those delays on the ocean, imported containers have sat at the West Coast ports for longer. The dwell time for containers arriving in Southern California is currently five to six days, versus two to four days for most of 2019 and 2020.
Here are a couple of highlights from what CPG companies have said about transportation during earnings season:
- Tyson: Freight costs are up 32%. So far, the company has been able to get the transportation capacity it needs and has been able to pass those costs on to its customers.
- Clorox: Carrier compliance has been lower, which has forced it to use the spot market more often. In some lanes spot rates have been 50%-75% above contract rates.
The Wall Street Journal broke down the onslaught on factors that are making it difficult for farmers to make a profit, even as they get more for their crops. Among the sources of pain are two cost categories specific to farmers: weed killers and fertilizers. Glyphosate, the active ingredient in weed killer Roundup, is up 250% from one year ago. In addition, one farmer said that his fertilizer costs rose from $175/ton last spring to $500/ton.
CPI may be the most watched inflationary indicator, but the producer price index, or PPI, remains worth watching as well to gauge the relative price pressure that businesses are facing. In January, wholesale prices rose 9.7% for the 12-month period. That’s worse than the 7.5% CPI reading in January, which implies that CPG companies are not unique in experiencing near-term margin pressure as a result of inflation.
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