Here we go again: Food inflation 2010

December 16, 2009

Fasten your seat belts, CPG and retailers!

Fasten your seat belts, CPG and retailers! The pricing turbulence that disrupted many strategies the past year and a half is about to escalate.

Expect food prices to jump as much as six percent in 2010 – led by climbs in milk, beef, pork and chicken. A shrink in livestock supplies and an anticipated economic rebound will propel hikes, Michael Swanson, a senior economist at Wells Fargo & Co., told Bloomberg L.P.

Their effect will multiply throughout the store because these foods are core ingredients in so many packaged products on shelves, notes Although consumers have gotten savvy about shopping and saving, another round of price hikes could send them reeling, just when they were beginning to feel their balance again.

Will they ratchet down the categories they buy? Or the premium brands they select? Will they move more aggressively into private label – especially if price gaps widen between store brands and name brands? Will it affect their expectations on markdowns when goods are promoted? 

These are a few questions which grocers will have to solve on the fly with CPG’s help or else risk losing share to supercenters, clubs, dollar stores, drug stores and other savings-oriented formats, we add at Such price hikes could raise uncertainty for many manufacturers that have trouble predicting demand accurately, and pricing and promoting accordingly; this in turn could make them less efficient, less profitable and less influential at the shelf.

Since producers of cattle, hogs, dairy cows and poultry cut output after feed costs rose in 2008, there is less supply as meat demand is growing in the United States and abroad, Swanson said in his interview. He expects a corn price rally because of ethanol demand, and that will affect animal feed costs. “Protein inflation is going to be much higher than people are anticipating,” he added.

With these grim prospects ahead, at least manufacturers and retailers can draw on their recent experiences to figure out the best ways to sustain share, meet shopper needs for savings, and avoid being unduly hurt by the inevitable shopper backlash.