Pepsi and Levi Strauss, two major global brands, told investors this week that they were raising prices to offset inflation, but rising costs of everything from aluminium to cotton signal tighter times ahead for consumer goods companies.
Due to global supply chain disruptions, freight costs and raw material prices have risen across industries this year, squeezing profit margins at companies trying to recover from the Covid-19 pandemic.
Prices for jeans, snacks, and sodas have already been raised by Levi Strauss & Co and PepsiCo Inc, two of the first consumer product firms to report quarterly earnings, in order to make up for the additional costs of raw materials which helped the companies to report better than expected earnings.
Higher prices of raw materials will continue to be a problem until at least the end of the year, according to analysts, even while these companies had been able to pass on the additional costs to their consumers. Analysts predicted some industries will havethe headwind of higher prices until the middle of 2022.
Businesses need to weigh the need to protect margins against the risk that raising prices will reduce demand for their goods even data from the government indicating that inflation has begun to erode consumer spending.
PepsiCo’s exposure to such a wide range of inflation was described as “stunning” by Credit Suisse analysts.
“We expect margin pressure to be the predominant theme through the rest of this earnings season,” they said. J.P.Morgan’s Andrea Teixeira said PepsiCo “is feeling and will continue to feel the impact of inflationary pressures and supply chain challenges.”
Even as the company faces higher packaging material costs and truck driver wages, PepsiCo CEO Ramon Laguarta remains optimistic.
“Across the world, consumer seems to be looking at pricing a little bit differently than before,” Laguarta said in an analyst call, highlighting the strength of the company’s brands and innovations.
Conagra Brands Inc, the maker of Slim Jims, echoed this sentiment. Previous price increases, which helped boost Levi’s gross margins, will be used to offset expected higher cotton prices next year, according to the company.
Some businesses, however, are feeling the pinch more than others.
Higher commodity prices such as aluminium, diesel, and wood will more than offset the benefits of price increases and a cost-cutting programme, said Constellation Brands, the maker of Corona beer, on Wednesday.
However, some companies are feeling the pinch more than others.
PepsiCo has achieved for itself a strong pricing power as it managed to cater to a surge in demand during the pandemic while at the same time also capturing a greater share of the market, while for Constellation, the firm has comparatively less ability to raise prices as it has struggled to keep up supplies, said Markus Hansen, Portfolio Manager at Vontobel Quality Growth, which holds stakes in both PepsiCo and Constellation.
“PepsiCo wasn’t shooting down the idea of price increases in the mid single-digit range – 4% or 5%. That’s a pretty powerful thing,” Hansen said, adding that for Constellation he was looking at a low single-digit range
(Adapted from Reuters.com)