The cost of food is down, but grocery bills are still up. here’s why

New York (CNN) Why aren’t the prices dropping at the grocery store? When food producers started raising prices a few years ago, they blamed their own costs, including rising ingredient prices. But ingredient prices have been falling for months and individuals are still paying more for food.

That’s partly because food producers have other expenses that remain expensive, like labor and transportation, compared to a few years ago.

But critics and industry experts say the cost increases allowed food makers to drive prices above what those increases called for, boosting profits and correcting what they saw as shortcomings. prices too low in previous years.

And now that they’ve seen people would pay more, they’re not rushing to give up the benefits by charging less.

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

Between January 2022 and January 2023, races became 11.3% more expensive. Many food companies anticipate that they may slow or suspend price increases, but not reduce them.

Grocery prices are still high

Agricultural commodity prices are down after peaking in May, according to the USDA. And the downward trajectory continues: Wheat, coffee and cocoa prices all fell in the last week of February, according to a recent Rabobank report. But ingredients usually make up a small portion of overall food costs. Manufacturers mainly pay for other things like transport, packaging and wages.

“There have been pressures on the supply chain and there have been increases in the cost of commodities. But (companies) have, I think, taken price increases that exceed that,” Mark said. Lang, an associate professor of marketing at the University of Tampa who specializes in food marketing. “They are, to me, absolutely for-profit.”

Conagra (GAC) And Hershey (HSY) reported higher earnings in their last quarters, year over year. PepsiCo (DYNAMISM) And Coca Cola (EAST) posted profit growth in the third quarter, before seeing a decline in profits later in the year.

Companies are keeping prices high, or continuing to raise them, at a time when many Americans are already struggling to pay for food, especially as pandemic-era food stamp benefits expire. “This type of activity, as a whole, is reducing the country’s standard of living,” Lang said.

“Casual Opportunities”

Inflation can give businesses a reason or an excuse to raise prices that buyers will accept.

A few years ago, food manufacturers “started raising their prices very quickly, because on top of the headlines – which (meant) consumers weren’t going to complain – everyone else was raising their prices” , said Dube. “And it took time for the consumer to realize that the prices had gone up.”

Some buyers may not have noticed slightly higher prices for individual items, or that they were paying the same amount for less product, known as shrinkage, although they may have realized that their dollars didn’t go that far in the supermarket.

But even if they timed the changes, people can’t just stop buying food. Many have reduced their restaurant visits or opted for cheaper chains and locations. Others shop at inexpensive grocery stores, like Aldi. Some may splurge on goodies at the store to replace more expensive luxuries.

Thus, people continue to buy food at the grocery store, despite higher prices, giving producers an opportunity to convince retailers that these higher prices will not scare away customers.

“The price was just too low”

Retailers want food manufacturers to keep prices low. It works well for them and for consumers, but not for manufacturers.

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

Conagra argues that its frozen food prices were too low before the pandemic.

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

On its fourth quarter earnings call, Coca-Cola was asked about reports of retailer refusals on pricing. “We’ve won the right to set prices with consumers,” CEO James Quincey said. If it can demonstrate that people will pay more for Coke, it can convince retailers that higher prices will also benefit them, Quincey said. Coca-Cola said it plans to continue raising prices globally, noting that input costs are still higher than usual.

Prices will eventually come down, predicts Tom Bailey, senior consumer food analyst at Rabobank. Some items, like lettuce and tomatoes, have already become cheaper at the grocery store, according to government data.

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

“If you start lowering prices, it can undermine the value proposition that brands and manufacturers have built over the years with their consumers,” Bailey said. Lower prices could, for example, make people think the quality of food has gone down – or make them think they were paying too much in the first place.

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