Summary
Commodity inflation appears to have peaked for the short term but long term commodities will continue to rise creating above average food inflation.How food and restaurant companies react will be the key to future price increases.
Analysis
Commodity prices are retreating in wheat, corn and oil (the BIG 3) in terms of cost inputs for most CPG food companies.Most food companies have been fairly aggressive at passing through commodity inflation in the form of higher retail prices.On average about 75% of commodity inflation is offset by price increases for the average CPG food company.Companies try to offset the remaining 25% through productivity programs(manufacturing,distribution and headcount cost reductions) and short term cuts in marketing and promotional spending.
With lower commodity costs does that mean food companies will be reducing prices any time soon ? Not so fast... like gas prices food pricing has been quick to go up but will be slow to come down... if at all.Most food companies will maintain the higher everyday prices in hopes of improving their battered margins.Instead of lowering prices food companies tend to deal back any savings or increase marketing and trade promotion spending.This has the effect of somewhat lowering prices but only for the savy shoppers who are willing to seek out and buy products on deal.
This "high/low" strategy or "price up deal back" strategy has been around for a long time in the food industry.It's the norm with traditional grocery retailers like Kroger,Safeway and Super Valu.Walmart has reduced its impact with their everyday low pricing strategy but even then companies get around it through the use of rollbacks and other promotional events.
Look for stable food prices with higher on deal percentages for the remainder of 2008 and more price increases as we head into 2009.
