Summary
Commodity prices continue to rise driving prices higher in the grocery aisle.Wheat ,corn,dairy and oil prices continue to climb creating a very challenging environment for food manufacturers and retailers.The rising prices begs the question of who will this benefit and who will this hurt over 2008 ? There are several distinct categories of companies that rising food costs will impact: --Branded Food Manufacturers (Kraft,General Mills,Kellogg's etc) --Value Food Manufacturers (Private Label producers,value priced branded companies) --Restaurants and Foodservice manufacturers --Grocery Retailers
Analysis
Lets start with the branded and value food manufacturers.Rising costs means price increases across the board for most manufacturers.As price increases are pasted on, consumers will begin to shift their purchase habits to buying lower priced alternatives (private label,value brands) and to buying more food on deal.This will put tremendous pressure on the premium branded products made by Kraft, General Mills etc. However will it truly benefit private label manufacturers and value brands ?
Lets look at the cereal category as an example.Kelloggs raw material cost per box of cereal is roughly 24%,General Mills 22% and private label and value brands at over 30%.As commodities rise its actually the private label and value brands that get hurt the most in the short term.The key is the ability to pass through price increases quickly to offset the margin hit.Here the branded items have an advantage because private label pricing has to be approved by the retailer and most private label pricing has definitive price contracts for set time periods.
What this means is longer term the private label products will benefit with share growth but margins will be significantly pressured in the short term.
Stay tuned for more on its impact to food retailers.
