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Food prices keep rising. Food-company execs are betting Americans will keep paying.

8:36 am ET November 7, 2022 (MarketWatch)

By Bill Peters

Increasing grocery prices could affect demand in Europe, where consumers seem to be cutting back, but analysts think U.S. consumers will continue to buy snacks and other products

Even as rampant inflation in food prices leaches away consumer spending power and disproportionately affects lower-income consumers, food-company executives and Wall Street analysts believe that Americans will continue to buy their favorite foods.

Across the industry -- from snack maker Mondelez International Inc. (MDLZ) to coffee chain Starbucks Corp. (SBUX) to candy company Hershey Co. (HSY) -- executives have proclaimed during earnings calls in recent days that they still have "pricing power," "strong pricing" or "price realization" in the tank. In other words, despite all the price increases over the past year or so, they believe they have the ability to hike prices further or keep them elevated, if they want to. In this industry, so-called elasticity, a measure of how likely higher prices are to turn off consumers, has remained relatively low.

For more: Food prices haven't risen so steeply since 1979, with one grocery staple up nearly 40%

Executives for Mondelez, which makes snacks like Oreo cookies and Triscuits, said following its earnings report on Tuesday that prices would go up in the U.S., Europe and elsewhere next month. They were also working out plans for more price hikes next year. Starbucks executives on Thursday said the chain's "pricing power" -- along with its younger customers, drive-throughs and customizable drinks -- gave them confidence they could hit sales-growth targets for fiscal 2023.

"Then you have the pricing power of Starbucks," Chief Executive Howard Schultz said during the company's earnings call. "We're certainly not going to try and raise prices during this time. But certainly we've demonstrated over the last 12 months or so that we've got almost 6% price increases and we haven't seen the loyalty and the transactions abate."

Schultz said Starbucks represented an "affordable luxury" to customers. Similarly, Mondelez Chief Executive Dirk Van de Put said his company's products were "affordable indulgences."

Hershey Co. (HSY), which reported results on Friday, raised its full-year outlook, citing "higher than anticipated consumer demand and favorable price elasticities," or little change in demand in a world of higher prices. Hershey Chief Executive Michele Buck said during the company's earnings call that its pricing for next year would be similar to this year.

She said some customers were switching to cheaper snacks, but that business hadn't been affected significantly.

"I would say historically, our category has tended to fare pretty well during these times, because it is an affordable indulgence when consumers can't afford a lot of other things," she said.

See also: Hershey's Q3 results 'cleared a high bar' but outlook conservative, says UBS analyst

Among non-indulgences, Kellogg Co. (K) on Thursday, said its third-quarter results were "led by price realization necessary to keep up with rising costs." However, executives said consumer demand hadn't changed as much as expected. And they raised their full-year outlook to reflect those results, stating that fourth-quarter sales growth would be "led by price/mix and sustained momentum in our business."

Wall Street analysts agree that the companies largely still have the power to continue raising prices without seeing a huge drop-off in unit sales. Food, analysts note, is less discretionary than, say, a new television.

"We find a fundamental backdrop that is improving, largely driven by pricing coming through at a robust rate, elasticity remaining low (actually trending lower of late), and at-home food consumption remaining elevated," Stifel food-stocks analysts wrote in an Oct. 24 note.

"Our outlook for pricing has increased such that we expect pricing to offset inflation during 3Q22 with our estimate for an increase in the gross margin in 4Q22," the analysts continued, adding, "our outlook is not without risk -- certainly pricing must remain at this high level."

Read: New mothers say inflation is making it difficult for them to pay for basic groceries

Coca-Cola Co. (KO), Kraft Heinz Co. (KHC) and Keurig Dr Pepper Inc. (KDP), which all reported earnings last week, have also said they have raised prices. The full effects of those changes are still shaking out.

"We expect inflationary pressures to continue, so we are leveraging all the levers of RGM [revenue growth management] at our disposal, including price, promotional intelligence, and proactive mix management," Coca-Cola Chief Executive James Quincey said on the company's earnings call last week.

In response to an analyst's question about whether pricing increases will need to be as aggressive up ahead, Quincey said the price of commodities was unclear and that they were still dealing with higher wages and supply-chain issues.

But he added: "The name of the game is to optimize our revenue equation over the next 12, 18 months. That's going to be a combination of smart pricing, understanding the mix both from a channel and package perspective, and being able to utilize the many levers that we have inside of the RGM tool kit that our bottlers have."

Those companies have raised prices in part to offset their own costs -- those related to wheat, food oils, dairy and other ingredients, along with expenses related to higher wages. But the increases have led to surges in profits and hefty investor payouts for some companies, along with concerns about a bigger squeeze on customers and shortages and hunger worldwide. Meanwhile, Kroger Co.'s (KR) merger deal with Albertsons Cos. Inc. (ACI) has led to worries that the combined company will suppress competition and charge customers more. Kroger, however, has argued that it has lowered prices after previous mergers and acquisitions.

Opinion: Food inflation has soared in the U.S. And now farmers are planting wheat in the most expensive harvest ever

And even within big financial gains, executives have noted more value seeking among lower-income consumers. Chipotle Mexican Grill (CMG), which has raised prices, said lower-income consumers were stopping by less frequently but noted that most of its consumers didn't fall into the low-income category. And McDonald's Corp. (MCD), where price increases also helped sales, said its lower-income consumers were starting to seek out value deals more frequently.

Quincey, during Coca-Cola's earnings call, said customers in Europe -- where an energy crisis has grown more acute -- were starting to gravitate toward cheaper goods. To some degree, customers in the U.S. were doing so as well.

"It would seem to us that Europe is probably the most obvious example, where, in the at-home channel, you can see some growth in private label across a number of categories," he said. "In beverages, you could see it tick up a little in water and juices. You can certainly see the growth of the hard discounters, some channel shifting in Europe."

But analysts also note that U.S. customers tend to put up less of a fuss over higher prices. And for Mondelez specifically, analysts said that essentially, people still like their snacks.

"Snacks are the new staple," Mizuho analyst John Baumgartner said in a note on Wednesday.

More: Kraft-Heinz is increasing prices again -- here's when analysts think food inflation might peak

While Baumgartner said he expected consumer demand to slow next year as rising prices siphon off more spending power, he said Mondelez and other snack makers could withstand the impact better than some of their grocery-store-aisle peers.

"We project that snacks should largely retain staple-like performance and as such, MDLZ's portfolio appears more attractively positioned relative to global Staples peers, selling household and personal care products, that are at more risk for demand destruction," he continued.

Not everyone was so upbeat in the near term about Mondelez -- in large part due to Europe, which accounted for nearly 40% of the company's sales last year. Business in that region softened amid negotiations over price increases and broader consumer anxieties, potentially offering a read-through to other global-goods companies looking to charge more.

"Based on our conversations, we suspect few investors are inclined to put new money to work in the stock heading into the winter with MDLZ's exposure to Europe," UBS analyst Cody Ross said in a research note on Tuesday.

-Bill Peters


(END) Dow Jones Newswires

November 07, 2022 08:36 ET (13:36 GMT)

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