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Why consumers should brace for higher food and beverage prices

In this article:
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Bryan Spillane, BofA Global Research Senior food and beverage analyst, joins Yahoo Finance to discuss the outlook on the food and beverage industry as companies try to offset inflation.

Video Transcript

ALEXIS CHRISTOFOROUS: Major food and beverage producers are sounding the alarm on higher prices coming later this year. It's yet another blow to consumers, who are already dealing with the biggest annual price increase in 13 years. Joining me now is Bryan Spillane, senior food and beverage analyst at Bank of America Global Research. Bryan, thanks for being with us. So earnings season is upon us. Do you expect to hear from executives at these food and beverage companies during their earnings call that consumers should be bracing for higher prices?

BRYAN SPILLANE: Yeah, I think you'll hear that in several different forms, but we began to hear about this as we moved through the first quarter earnings season. And you know, what we've seen in the market across food and beverage companies is either price increases having already affected the market, or already have been announced. And I think there's also another element to this, in that not only are list prices moving up, but you're seeing companies reduce the depth of their promotions. So if you look at soft drink sales over the course of the Memorial Day, July 4th holiday, the promotional depth was definitely not what it had been the year before. And again, I think that's just another way to try to-- to try to drive a little bit more pricing in the market.

ALEXIS CHRISTOFOROUS: Mhm. You know, anecdotally, I'm hearing that prices are higher. I'm seeing prices higher at the supermarket. How bad is it, really? I mean, what are we paying more for than we have in years? What are some of the sectors of food and beverage where prices are rising perhaps more quickly than other areas?

BRYAN SPILLANE: Right. So, you know, as I mentioned, some of the more promotional seasonal items, you're definitely paying a higher price than you were before. So you're seeing it in areas like soft drinks. I think when you look across other products where there's like a more immediate sort of pass-through, you're seeing it in certain areas in the protein market, for instance. Like beef prices are high, is another. I think as you move through the course of the balance of this year, you're going to see even more of it in some of the packaged foods. So things of like breakfast cereal, snacks, you're going to see more pricing there as you move on through the course of the year. But initially, it's been a lot of these more pass-through categories, and also the ones that tend to be more heavily promoted around the summer holidays.

ALEXIS CHRISTOFOROUS: Right. I mean, to your point, General Mills already warned of higher prices ahead. Constellation Brands, which has Corona beer and other beverages, saying the same thing. But why are prices moving up so much and so quickly? We had been hearing about supply chain issues. Is that really the driving thing right now that's behind these price increases?

BRYAN SPILLANE: Yep. So there's two reasons. One is the input costs for these companies have moved up, right? We'll have Conagra Foods and PepsiCo report earnings tomorrow, and you know, our expectation is that, as Conagra is looking out into a new fiscal year right now, and we think that their commodity cost inflation, so what-- their cost of goods inflation for fiscal '22 is going to be somewhere between 8% and 10%. And you know, if they're going to try to protect margins, there's going to-- there will need to be an element of raising prices in order to protect margins. So that's one piece, is these two companies beginning to sort of get ahead of inflation.

But the second part is also, in some sectors, there's also just tightness in supply. And so the soft drink market's a really good example. You're still going through a period where can supplies are tight. And so, you know-- and I'm guessing we'll hear some of this from-- we expected to hear from this from Pepsi tomorrow, is just simply, with canned supplies being tight, it doesn't really make much sense to promote aggressively because then you're going to run out of cans and be out of stock. So there's a combination of supply chain, tightness in certain products or certain materials, and also, again, these companies trying to get ahead of what's been the biggest surge in raw material inflation in 10 years.

ALEXIS CHRISTOFOROUS: And give us your take on coffee prices going forward, because I know Brazil right now, which is a huge coffee producer, going through its worst drought in a century, and that's been putting a lot of pressure on global coffee prices in the commodities market. Has that start to show-- has that started to show up at the supermarket yet, and how bad do you think it might get?

BRYAN SPILLANE: Yeah, it hasn't yet, but it will, I think is a good way to think about it. You know, the coffee manufacturers tend to buy their coffee hedged or contracted out anywhere between six months and 18 months. So there's not as much of an immediate need as the volatility in crop and spot prices move. But I think the combination of the drought in Brazil, some shortness in coffee supplies, and frankly, coffee prices have been pretty benign, or coffee costs for the coffee manufacturers have been pretty benign for the last couple of years, I think you're-- that combination of factors will, I think, you know, combine tend to see coffee prices move. And this is a market, it's a pass-through category. It's one where you can see prices move up 5% or 10% without really having to blink an eye.

ALEXIS CHRISTOFOROUS: Oh, boy. All right, consumers getting ready to get squeezed even more-- if you can work at the gas station. Bryan Spillane, senior food and beverage analyst at BofA Global Research, thank you.