Monday, May 20

Will food prices stop rising rapidly? Many companies say yes.

Few prices are as visible to Americans as those they encounter at the grocery store or at a drive-through window, which is why two years of rapid food inflation have presented a major obstacle for U.S. families and the Biden administration.

Shoppers have only slowly regained confidence in the state of the economy as they pay more to fill their carts, and President Biden has made a habit of shaming food companies, even making a Super Bowl Sunday video criticizing snack manufacturers for their “rip off”. prices.

But now, the trend of food and restaurant inflation appears to be about to change.

After months of rapid increases, the cost of food delivery increased at a significantly slower pace in January. And from packaged food suppliers to restaurant chains, companies across the food industry report they are no longer raising prices so dramatically. In some cases this is because consumers are finally pushing back against price increases after years of spending through them. In others, it’s because the prices companies pay for inputs like packaging and labor are no longer rising so sharply.

Even if food inflation cools, that doesn’t mean your grocery bill or restaurant check will go down — it just means it will stop rising as quickly. Most companies are planning smaller price increases rather than sharp cuts. But when it comes to whether rapid increases in food and restaurant prices are behind us, what executives are telling investors offers some reason for hope.

Executives have discovered in recent months that they can only raise prices so far before consumers reduce them.

Soft drink and snack maker PepsiCo had raised prices by double-digit percentages for seven consecutive quarters, and although that streak ended at the end of 2023, PepsiCo still raised prices by 9% in the final months of the year.

But all these increases in the prices of drinks and chips have started to take their toll. The company recently reported a surprising decline in sales.

Ramon Laguarta, PepsiCo’s chief executive, said on a recent earnings call that the company would be less likely to raise prices beyond “normal pricing levels” — about 2-3% a year. The company is seeing more moderate cost increases on ingredients and is focusing more on maintaining sales, he said.

James Quincey, Coca-Cola’s chief executive, explained in a recent earnings call that the company has noticed a clear divide among U.S. customers: Some are under financial stress and are facing a “real squeeze on spending power.” , while others “still have a lot of money, a lot of purchasing power” to spend on lactose-free milk and protein shakes.

Walmart, the nation’s largest retailer, reported strong U.S. sales in the fourth quarter, in part because more higher-income families turned to the value chain to shop for groceries.

“We continue to see a resilient, but value-seeking customer,” Doug McMillon, Walmart’s chief executive, said on an earnings call Tuesday. He noted that food and consumer prices are still “slightly” higher than a year ago.

“Prices are lower than a year ago in places like eggs, apples and snacks, but higher in other places, like asparagus and blackberries,” he said.

Some companies appear to be following the rest of the economy toward more moderate price changes. Headline inflation, as measured by the consumer price index, peaked at 9.1% in the summer of 2022, but slowed to 3.1% earlier this year, while housing costs Food commodities such as beef, grains and some dairy products have declined.

“Our prices in general are falling in line with inflation returning to what I will call more normal levels,” Ian Borden, McDonald’s chief financial officer, said in an investor conference. (McDonald’s executives also noted that they were seeing some low-income customers spend less per visit.)

Shake Shack, the burger and ice cream chain, is planning to raise prices 2.5% this year — a return to the kind of increases that were normal before the pandemic, Katie Fogertey, the company’s chief financial officer, said in a recent earnings call.

But he noted that some stores would need to raise prices more to offset the increased costs. In particular, this is true in markets where workers are hard to find and larger price increases are needed to “offset inflationary pressures on wages,” she said.

Such comments highlight an important point. Many companies have taken advantage of inflation to boost profits, but some of the food and restaurant price increases in recent years have been aimed at covering higher costs. Wages rose rapidly in the hospitality and retail sectors, and key ingredients were expensive due to supply chain problems, Russia’s invasion of Ukraine and bird flu attacks.

Companies typically at least try to raise prices when the cost of doing business increases to avoid losing profits. But as pressures on wages and production costs begin to fade, companies can stop aggressively raising prices without risking compromising their profits.

Of course, there is a way to cover higher costs without raising prices: Companies can improve their productivity, so that each worker can stock more shelves, flip more burgers, or wait on more tables. This is, in part, what Wendy’s is doing.

The fast-food chain is rolling out digital menus, hoping they will deliver “immediate benefits in order accuracy, improve the staff experience” and enable sales growth, Kirk Tanner, the company’s chief executive, said at a recent conference on profits.

Wendy’s also plans to try “dynamic pricing,” he said, using technology to change prices to meet consumer demand. Another company executive suggested that the company expects “low single-digit prices” this year.

Taken together, the signs suggest that food and restaurant inflation is likely to prove more moderate in 2024 compared to the previous three years.

Many food-related input costs are decreasing or increasing less aggressively. Wage increases remain high in the restaurant industry, but are returning to normal. And consumers are starting to push back against the kind of big price increases that companies were using to boost their profit margins.

Michael Swanson, chief agricultural economist at Wells Fargo, expects food inflation to fall to 0.5% this year – “much slower than it has been in the past” – although restaurant inflation could remain stronger as people continue to open their wallets to eat out.

There too, he said, “the trend will lean downward.”

Jordyn Holman contributed to the reporting.