The challenge for food companies in 2022 is managing inflation
By Douglas HartBusiness Operations Editor pick Food inflation
Food companies have always had challenges in running their businesses ranging from facing new competitors, improving products, managing production to finding new customers and increasing sales. COVID-19 has thrown many wrenches into the works for food processors over the last two years. Many of these challenges, such as shortage of workers, difficulty in getting food inputs and packaging and reliability of shipments, are still with us. One of the overriding challenges this year is rising costs and how to manage inflation.
Each food sector has had its own challenges contributing to rising costs. Climate change is one. Last summer, the drought in the prairie provinces had a devastating effect. Ranchers sold off their herds as there was no water or feed. Floods in BC caused havoc for beef and dairy herds and crop producers experienced low yields. Further, higher feed costs have driven up ranchers costs. As a result, beef costs have increased.
The war in Ukraine, in addition to the devastating impact on its citizens, will result in lower wheat output this year. Ukraine and Russia produce 14.6 per cent of the world’s wheat. (Canada produces 4.3 per cent and US produces 6.5 per cent of world’s wheat) A shortage of wheat and flour will impact food companies in many sectors, resulting in the the prices of commodities.
Food companies in Canada are experiencing a shortage of skilled labour for their processing plants. As a result, some food plants experience inconsistent production outputs. Companies have had to increase wages to attract new workers, but training new hires takes time. This has increased labour costs.
The challenge in 2022 for food companies is how to deal with the culmination of these overlapping factors leading to rising costs and inflation across the entire food industry. Most senior managers at food companies today have never experienced inflation in their careers. Inflation is here to stay longer than most of us would like, and food processors need to understand how to manage their costs and prices to succeed.
Inflation increased significantly in Canada. In February 2020, the inflation rate in Canada was 1.1 per cent. By February 2022, inflation increased to 5.7 per cent in Canada. This is the highest inflation rate in Canada since 1991.
Food prices have increased as well. The cost of food at grocery stores in Canada increased by 7.4 per cent in the last year. Beef prices are up by 20 to 30 per cent. The price of food in grocery stores rose at the fastest rate in 13 years. The top contributors to inflation in Canada today are food, gas and housing. Clearly inflation is firmly set in the economy. The Bank of Canada raised its prime lending rate by 50 basis points in mid-April and further increases are expected this year to rein in inflation.
Food processors find that while their food input and ingredient costs may be up by 10 per cent or more packaging costs are up higher than that. This includes plastic packaging, bottles, containers, lids and other packaging materials. Higher oil prices are causing plastic costs to rise. Bottles, cans and other packaging costs are also rising due to increased shipping costs for products sourced from China and other countries.
Typically food companies face stiff opposition from grocery retailers for any price increase request. One of the more public examples of this was when Loblaws refused to permit a price increase for Frito-Lay products. In response Frito-Lay pulled its products off Loblaws shelves. After a few months Loblaws reached a new pricing deal with Frito-Lay and the chip products are now back on Loblaws shelves.
I spoke to a number of food companies in BC and Ontario in preparing this article and found that food companies have been successful in passing on their higher costs to grocery stores. Clearly higher prices are being passed on to grocery retailers, as consumers are seeing higher prices for most products including baked goods, fruits and vegetables, packaged and prepared foods, beverages and meat.
Consumers will notice that food products are not only more expensive but the size of the products has also been reduced.
Food companies need to come prepared to demonstrate to retailers exactly what their higher costs are. A well planned-out presentation showing higher food ingredient, packaging and shipping costs is required to have a grocery buyer consider a price increase. A change in the grocery retail environment is category buyers being receptive to a justifiable request for a price increase. An interesting but compelling reason for accepting higher supplier costs is that grocery retailers make higher dollar profits on a higher priced product as their usual margin is applied to the higher price. While food companies may be able to pass their higher costs on to grocery stores, the stores end up making more money.
During this inflationary period food companies need to know their costs in detail on a real-time basis. While prices used to be set for a year or longer, companies must know how their costs are changing for ingredients, packaging, shipping and labour to determine their profit, and whether an adjustment to their prices is required to maintain profitability. Controlling costs and improvements in efficiencies remain on-going prime tasks of management.
Douglas Hart is president of Hart & Associates Management Consultants, a firm providing business development services to agri-food companies across Canada.
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