Too-Hot Commodity

As food prices continue upswing, will consumers fork it over?

Abbie Westra, Director, Editorial, CSP

It hasn't been very long since our last big food-price surge. The industry felt commodity prices bubble up back in 2007. Then the Producer Price Index increased, followed by acceleration in consumer prices. In 2008, the country experienced year-over-year increases in the Consumer Price Index for food, the highest level in 26 years.

Today, commodities are continuing their months-long upsurge, and the U.S. Department of Agriculture forecasts food prices will jump between 3% and 4% this year. Many manufacturers and operators have already responded with price increases and cost cuts.

[image-nocss] A crucial difference between then and now, says Bill Lapp, founder and president of Advanced Economic Solutions, is the consumer. Comparatively worse economic conditions and unemployment rates lead to a consumer base less willing to step up and pay those increased prices, especially as they've grown accustomed to the deep discounts of the recession.

"[Operators] are in an extremely competitive environment, one where you have to be judicious about increasing your prices," Lapp, who has spent the past 25 years analyzing and forecasting commodity markets, including as chief economist for ConAgra Foods, tells Foodservice Digest.

"You have to be thoughtful and recognize the fact that while you're trying to cover your costs and maintain a desired margin you face the peril of losing market sharenot for the short-term but for an extended period of time if you're the only one who increases prices."

Sure, companies can implement some proactive risk management to stave off any further volatility this year. But at this point in the crisis, "it's hard to prescribe a remedy for keeping your house from burning down when it's already on fire," says Lapp.

And while reducing operational expenses is an obvious way to absorb some of the food-price increases, the recession already forced most businesses to do that.

"They've already turned that stone over," says Lapp. "The more prudent approach is to accept this as your fate for the time being and try to be proactive on the pricing side. This isn't an isolated problem that one concept or channel faces. This is a broad-based problem that's faced by one and faced by all.

"The remedy for these higher priceswhich are substantial and going to have a substantial impact on your earningsis to take price wherever possible," says Lapp. If you're a price leader, that means having a strategy to pull higher prices that won't adversely impact your market share.

If you're a price follower, "it behooves you to pay much closer attention than you have in the past."

Abbie Westra, CSP/Winsight By Abbie Westra, Director, Editorial, CSP
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