The cost of food has fallen, but grocery bills are still rising. This is why

New York (CNN) Why aren’t supermarket prices falling? When food manufacturers started raising prices a few years ago, they blamed their own costs, including higher ingredient prices. But ingredient prices have been falling for months and people are still paying more for food.

In part, that’s because food producers have other expenses that remain pricey, such as labor and transportation, compared to a few years ago.

But critics and industry experts say the cost hikes gave food manufacturers leverage to raise prices beyond what those increases required, boosting profits and correcting what they saw as underpricing in previous years.

And now that they’ve seen people pay more, they’re not rushing to give up profit by asking for less.

“When costs change, especially when costs change in a very publicized way,” it’s not uncommon for companies to use the moment to raise prices, said Jean-Pierre Dubé, a marketing professor at the University of Chicago Booth School of Business. “Companies see these as occasional opportunities and don’t want to miss them.”

Between January 2022 and January 2023, groceries became 11.3% more expensive. Many food companies predict that they can slow or pause price increases, but not lower them.

Supermarket prices are still high

According to the USDA, agricultural commodity prices have fallen after peaking in May. And the downward trajectory continues: Wheat, coffee and cocoa prices all fell in the last week of February, according to a recent report from Rabobank. But ingredients typically make up a small portion of the total cost of food. Manufacturers usually pay for other things, such as transportation, packaging, and wages.

“There has been pressure on the supply chain and increases in raw material costs. But [companies] have, I think, taken price increases that exceed that,” said Mark Lang, an associate professor of marketing at the University of Tampa who specializes in food marketing. “They’re definitely profit-taking to me.”

Conagra (CAG) And Hershey (HSY) reported higher earnings in their most recent quarters, year over year. PepsiCo (FUT) And Coca-Cola (IS) reported earnings growth in the third quarter before seeing earnings declines later in the year.

Companies are maintaining, or continuing to raise, high prices at a time when many Americans are already struggling to pay for food, especially as the benefits of pandemic-era food stamps expire. “These kinds of activities are massively lowering the country’s standard of living,” Lang said.

‘Occasional opportunities’

Inflation can give companies a reason or an excuse to raise prices that shoppers will accept.

A few years ago, food manufacturers “began to raise their prices very quickly, because in addition to the front page news – which [meant] consumers weren’t going to complain — everyone raised their prices,” said Dubé. “And it took a while for consumers to understand that prices have gone up.”

Some shoppers may not have noticed that prices for individual items were slightly higher, or that they were paying the same amount for less product, known as shrinkage inflation, even though they may have realized their dollars at the grocery store weren’t going that far.

But even when they’ve clocked the changes, people can’t just stop buying food. Many have cut back on restaurant visits or traded for cheaper chains and venues. Others shop at discount grocers, such as Aldi. Some may splurge on store-bought treats to replace more expensive luxuries.

So people continue to buy food at the supermarket despite higher prices – giving producers a chance to convince retailers that those higher prices aren’t driving customers away.

‘Price was just too low’

Retailers want food manufacturers to keep prices down. That works out well for them, and for consumers, but not for manufacturers.

When asked at a conference in February how Conagra could raise prices without losing sales based on volume, CEO Sean Connolly said, “Prices were just too low in the freezer pre-pandemic,” adding, “what we have been able to illustrate to the retailer is that consumers will welcome a $4.50 unit” because a frozen meal at that price is still good value.

Conagra says prices of its frozen foods were too low before the pandemic.

Conagra, which makes frozen pizzas and bowls from Marie Callender’s, Birds Eye and Healthy Choice, said the higher prices have allowed it to improve its ingredients. In the quarter ended Nov. 27, it reported net income of $382.2 billion, up about 39% year-over-year.

During its fourth-quarter earnings call, Coca-Cola was asked about reports of retailer price pushback. “We have earned the right to praise with the consumer,” said CEO James Quincey. If it can show that people will pay more for Coke, it could convince retailers that higher prices will be good for them, too, Quincey said. Coca-Cola said it plans to continue raising prices globally, noting that input costs are still higher than normal.

Eventually, prices will fall, predicts Tom Bailey, senior consumer food analyst at Rabobank. Some items, such as lettuce and tomatoes, have already become cheaper in the supermarket, according to government data.

If and when companies moderate their prices, they will have to do so carefully, Bailey said.

“If you start lowering prices, it can undermine the value proposition that brands and manufacturers have built over the years with their consumers,” said Bailey. For example, lower prices can make people think food quality has dropped, or that they are overpaying in the first place.






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