Before we get into CPG news, I encourage readers of The Stockout to join us at The Future of Supply Chain event, taking place May 9-10 at Rogers Convention Centers in northwest Arkansas. Keynote speakers include Arkansas Governor Asa Hutchinson and former Pentagon Chief Spokesman Jonathan Hoffman. The CPG industry will be well represented with speakers from Nestlé (Greg Kessman, Senior Director of Supply Chain) and Tyson (Ildefsonso Silva, Executive Vice President of Business Services). Click here to buy tickets.
Last week I provided initial thoughts on the likely impact of the Ukraine crisis on CPG businesses, largely related to exacerbating inflationary pressures on ingredients. The continued rise in ingredient costs calls into question some of the initial outlook for 2022 that the CPG companies communicated to investors in their latest earnings calls. 2021 has been challenging for most CPG companies and has been a year characterized by costs rising faster than prices, resulting in significant margin erosion for many CPG companies. 2022 was expected to be a year when CPG businesses recovered most, if not all, of the margin pressure they experienced in 2021. Now, continued rising raw material costs are expected to trigger new rounds of GIC price increases that will be delayed. the retail channel and ultimately borne by consumers. But as companies experienced last year, there is a delay associated with the pass-through of commodity costs, as companies must first honor contracts in place with retailers. Therefore, I expect many CPG firms will have to extend the timeline for when they plan to restore margins to targeted levels, with fewer firms reaching that milestone this year.
Just Food has launched another website which I find useful in assessing the potential impacts that the Ukrainian crisis will have on global food supplies. Readers can see detailed breakdowns of Ukraine’s exports, trading partners and developing news. It is 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 statistic that jumps out at me: In developed countries, food accounts for about 15% of consumers’ budgets, while in developing countries, food accounts for about 50%. This really puts into perspective the 7-8% inflation we’ve seen in US food prices so far and highlights the humanitarian hardship that could result in many countries.
Contrary to the intuition of many, rising inflation levels could benefit GIC demand, at least in the early stages of the inflationary cycle, as consumers shrink by eating more meals at home. Grocery prices have risen 7.4% over the past year and consumers are taking notice. In fact, some recent studies have shown that some consumers are overestimating the increase in the price of groceries, perhaps because they are so focused on meat prices, which are rising sharply in the double digits. But the cost of eating in restaurants has grown even faster, at 8% year-over-year for restaurants, so groceries may actually become more competitive, on a relative basis.
The Washington Post argue that wheat and seed oil exports could not only be significantly reduced as a result of the Ukrainian crisis, but that it could be years before there is a return to normal. Although there are still months until the fall wheat sowing season, Ukrainian farmers may not be able to sow and harvest this year. During this time, Russian crops will be planted but will be embargoed in many markets. Food items that will have higher prices due to lower supply include anything grain-related (bread, beer, grain and animal feed – and therefore meat); vegetable oils (sunflower oil but also other vegetable oils that can be used as alternatives, such as soybean oil and palm oil); and fertilizers (due to rising energy prices and Russia’s status as the main supplier of natural gas and main exporter of fertilizers) and fertilizer-intensive crops, such as corn .
Supply chain issues are hitting sales at JM Smucker Company’s pet food business. In its latest call with analysts, giant CPG said it continued to face supply chain and transportation constraints that were hurting its ability to fully meet demand, particularly in its pet food business. company. The company’s supply chain disruptions are primarily related to wet food and pet packaging. In response, the company allocates production to its most profitable items, such as Meow Mix cat food.
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