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TheStreet took a look at the effect of rising commodity prices on ten food companies. The companies reviewed were Hershey, Kraft Foods, McDonald’s, Starbucks, Kellogg, Sara Lee, Panera Bread, J.M. Smucker, PepsiCo, Chipotle Mexican Grill (read the article).
I have 3 take-aways from the article:
1. This is a long-term issue
“Food inflation – from corn and cocoa to sugar and wheat – is an increasingly important global issue and unlikely to go away anytime soon.”“The growing middle class in China and India where demand for beef and vegetable-based proteins grew disproportionately to demand for grain-based diets. Converting soft commodities like corn and wheat into protein — think cows and poultry — is inefficient, costly and time-consuming. ”
I’ll add that it’s not just a growing middle class issue but also one of absolute growth in population. The world added roughly 211,000 mouths to feed yesterday and will continue to do so every day for the foreseeable future. And lastly, biofuels could become an important element of the equation. Sugar is used for ethanol, palm oil is used for biodiesel and the U.S. uses roughly 25% of its corn for ethanol. There is a brewing food vs. fuel debate on the horizon.
2. Commodity costs will put tremendous pressure on margins in 2011
It’s a common theme echoed across food and beverage companies that rising commodity prices are affecting bottom lines and not all costs can be passed on to consumers through higher prices.
“Hershey cautioned its margins would continue to be pressured since passing on all the higher ingredient costs to consumers could hurt its sales.”
“Kellogg cautioned this month its margins would remain under pressure as a still-weak economy will lead it to carry some of the higher costs since raising prices could dissuade already-choosy consumers.”
“Kraft Foods said higher input costs led its operating income margin to fall 240 basis points year-over-year.”
“Higher food costs led Sara Lee to miss fiscal-second quarter earnings expectations. It said commodity costs increased by $127 million last quarter, and by $219 in the first half of its fiscal year, partially offset by $123 million in higher prices during the first two quarters, resulting in a net unfavorable commodity cost impact of $96 million.”
“In its fiscal-second quarter earnings report in November, Smucker said escalating commodity costs will continue to present challenges. Its U.S. retail oils and baking segment saw profit decline 10% in the period as costs rose for milk, sugar, and soybean oil.”
3. Commodity costs have become a CEO/CFO Issue
“McDonald’s, Chief Financial Officer, Peter Bensen said it would raise prices where it makes sense but would carry some of the higher costs itself, rather than passing it all on to consumers, many of whom patronize McDonald’s for its everyday low-cost food offerings.”
“Kraft Foods, CEO, Irene Rosenfeld said looking ahead, we expect the operating environment to remain challenging, with significant input cost inflation and persistent consumer weakness in many markets.”
“PepsiCo, CEO Indra Nooyi, said high levels of commodity cost inflation will weigh on PepsiCo’s results this year.”
“PepsiCo, CFO Hugh F. Johnston, said he expects PepsiCo’s commodity costs to rise between 8% and 9.5% in 2011.”
“Chipotle Mexican Grill, CFO, Jack Hartung said we expect continued inflationary pressure on many of our ingredients, especially chicken, beef and avocados, during the year.”