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

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

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

In part, this is because food producers have other costs that remain expensive, such as labor and transportation, compared to a few years ago.

But critics and industry experts say rising costs gave food producers cover to raise prices above what those increases required, boosting profits and correcting what they saw as very low prices in previous years.

And now that they’ve seen that people will pay more, they’re in no rush to give up profits by charging less.

“When costs change, especially when costs change in a highly publicized way,” it’s not unusual for companies to use the moment to raise prices, said Jean-Pierre Dubé, a marketing professor at the University of Chicago Booth School of Business. “Companies see these as random opportunities and don’t want to miss them.”

Between January 2022 and January 2023, food prices rose 11.3%. Many food companies are predicting that they can slow or stop price increases – but not lower them.

Food prices are still high

Prices for agricultural commodities have eased after peaking in May, according to the USDA. And the downward trajectory continues: Commodity prices for wheat, coffee and cocoa 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. Producers are paying mostly for other things like shipping, packaging and wages.

“There have been pressures on the supply chain and there has been an increase in the cost of goods. But [companies] I think they’ve gotten price increases that outweigh that,” said Mark Lang, an associate professor of marketing at the University of Tampa who specializes in food marketing. “To me, they’re absolutely profitable.”

Conagra ( CAG ) and Hershey ( HSY ) reported higher earnings in their most recent quarters, year over year. PepsiCo ( PEP ) and Coca-Cola ( KO ) reported profit growth in the third quarter, before seeing profit declines 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 kind of activity, in the big picture, lowers the standard of living for the country,” Lang said.

‘Random Opportunities’

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

A few years ago, food manufacturers “began to raise their prices very quickly, because in addition to the main news – which [meant] Consumers wouldn’t complain — everyone was raising their prices,” Dubé said. “And it took a while for the consumer to realize that prices have gone up.”

Some shoppers 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 their dollars weren’t going as far at the supermarket .

But even if they changed the clock, people can’t stop buying food. Many have cut back on restaurant visits or switched to less expensive chains and places. Others are shopping at discount grocery stores, such as Aldi. Some may shop for groceries to replace more expensive luxuries.

So people continue to buy food at grocery stores despite the higher prices — giving manufacturers an opportunity to convince retailers that those higher prices won’t drive customers away.

‘The price was too low’

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

When asked during a conference call in February how Conagra was able to raise prices without losing volume sales, CEO Sean Connolly said that “price was very low in the pre-pandemic freeze,” adding, “what we have been able to illustrate to the retailer is that consumers will welcome a $4.50 unit” because at that price, a frozen meal is still a good value.

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

Conagra, which makes Marie Callender’s, Birds Eye and Healthy Choice pizzas and frozen bowls, said 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.

During its fourth-quarter earnings call, Coca-Cola was asked about reports of retailers pushing prices. “We’ve earned the price right with consumers,” said CEO James Quincey. If it can show that people will pay more for Coca-Cola, it can convince retailers that higher prices will be good for 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, a senior consumer foods analyst at Rabobank. Some items, such as lettuce and tomatoes, have already become less expensive at grocery stores, according to government data.

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

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

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