CPG powerhouses aplenty at Future of Supply Chain

Before getting into CPG news, I encourage readers of The Stockout to join us at The Future of Supply Chain event, which takes place May 9-10 at the Rogers Convention Centers in Northwest Arkansas. Keynote speakers include Arkansas Gov. Asa Hutchinson and Jonathan Hoffman, former chief Pentagon spokesman. The CPG industry will be well represented with speakers from Nestle (Greg Kessman, senior director of supply chain) and Tyson (Ildefsonso Silva, EVP of business services). Click here to purchase tickets. 

Last week, I provided initial thoughts on how the Ukraine crisis is likely to impact CPG companies, largely related to exacerbating the inflationary pressures on ingredients. The further rising ingredient costs call into question some of the initial 2022 outlooks that CPG companies issued to investors on their most recent earnings calls. 2021 was challenging for most CPG companies and was a year characterized by costs that rose faster than pricing, leading to a significant erosion in many CPG companies’ margins. 2022 was supposed to be a year when CPG companies recovered most, if not all, of the margin pressure they experienced in 2021. Now, the further-rising commodity costs are likely to set off additional rounds of CPG price increases that will be pushed through the retail channel and ultimately borne by consumers. But as companies experienced last year, there is a time delay associated with passing through commodity costs as companies must first honor contracts in place with retailers. Therefore, I expect that many CPG companies will have to extend the time frame for when they expect to restore their margins to targeted levels with fewer companies achieving that milestone this year. 

Just Food launched a separate website that I find helpful in evaluating the potential impacts that the Ukraine crisis will have on food supply globally. Readers can see detailed breakdowns of Ukraine’s exports, its trading partners and developing news stories. That’s also a source that can help readers think through the possibility of the conflict causing a regional recession/depression versus a global recession. Here’s a food stat that stands out to me: In developed countries, food represents about 15% of consumers’ budgets, whereas in developing countries, food represents around 50%. That really puts the 7%-8% inflation that we have seen in food prices, so far, in the U.S. into perspective and highlights the humanitarian hardships that could result in many countries. 

Contrary to the intuition of many, rising inflation levels could benefit CPG demand, at least in the early stages of the inflationary cycle, as consumers trade down by eating more meals at home. Grocery prices have risen 7.4% in the past year and consumers are noticing. In fact, some recent studies have shown that some consumers are overestimating how much the price of groceries is rising, perhaps because they are so focused on meat prices, which are up strongly into the double digits. But the cost to eat at restaurants has risen even faster, at 8% year-over-year for restaurants, so groceries may actually be getting more competitive, on a relative basis.