Cost of Ingredients: After several years of relatively stable prices, the food industry is seeing the cost of ingredients, packaging and shipping increase, sometimes substantially. What is driving these cost increases? World economic growth, rising crude oil prices, shrinking stockpiles, strong commodity demand and severe crop-destroying weather have created a situation resulting in rising food costs worldwide. In fact, the global food price index, compiled from price data for sugar, cereals, oils, meat and dairy products, recently reached an all time high.

Producer Price Index: Recent government reports indicate that the yearly increase in costs of food products and ingredients in the U. S. is beginning to raise fears of inflation. The food at home component includes grocery staples such as milk, bread, and vegetables. Overall consumes saw these prices increase by 2.8%. However, some products are up substantially higher. Meat and meat products are up 4.8%; dairy products 9.2%; oils and fats 5.6%; grain starches etc 8.7%; bakery and similar products and ingredients 4.2%.

Impact on Food Manufacturers & Distributors: Many companies are feeling the squeeze on their margins as they are caught in the middle between supplier cost increases they cannot refuse, and the push back from retailers and restaurants that are concerned about the impact of price increases on their retail consumers. One way manufacturers are addressing this problem is to reduce product sizes. Tropicana orange juice, for example, used to come in a 64 oz. carton — the new size is 59 ozs. Kraft American cheese has removed two slices out of its regular 24-slice package, and Chicken of the Sea – Salmon replaced its 3-ounce container with a 2.6 oz container. And for coffee, you need to carefully read the package to see the amount you are getting.

Importers: Food manufacturers and importers that own and control their own brands have it easy compared to companies that import specialty food and grocery brands from Europe and sell the products to retailers or other distributors. Not only do importers have the same ingredient costs passed on to them by the manufacturers, they are also facing the “bunker” –i.e. fuel oil charges that freight lines charge. In addition, the low exchange rate of the dollar compared to the Euro is producing another significant burden.

Survival: Under these trying conditions, it is imperative that food manufacturers, distributors and importers, all negotiate price increases with their suppliers. Understand however, suppliers need price increases to preserve their margins also. Selective price increases are needed to maintain margins. Sales people need to be trained to present the prices increases in the least offensive way and they need to be given the information as to why they are necessary. Some sales may be lost, but overall that is the price of survival.

Industry knowledge: The Tidewater Group specializes in the food industry. We are knowledgeable about mergers and acquisitions, financial structure, strategic planning, financing and other issues important to owners in the food industry. If we can be of service, please give us a call at 910.793.9224

 

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