Skyrocketing Food Prices Rock Companies’ Margins

Food companies will now have to increase marketing spending to support sales volume--can they remain profitable?

May 28, 2014 at 9:07AM

U.S. food commodity prices have been soaring in recent months, which is likely to challenge food companies' margins and sales volumes in the near term. Input cost inflation pressures have forced many food companies to increase prices to protect their top-lines and margins.

Rising commodity prices
Food companies Kraft Foods (NASDAQ:KRFT), Dean Foods (NYSE:DF), and Hillshire Brands (NYSE:HSH), with exposure to dairy and meat products as well as coffee beans, are being challenged by increasing food commodity prices. Coffee bean prices have increased about 65% year to date because of a drought in Brazil, as the country contributes a significant 35% to the world's coffee production.

In addition, meat product prices have surged by 20% year to date, as PEDv (a virus) resulted in a supply shortage. Raw milk prices have been on the rise in recent quarters because of growing export demand from Asian markets. In 2013, U.S. dairy product exports were up 19% year over year. Prices for dairy products in the U.S. have grown by about 20% year to date.

Sales volumes to be challenged
In response to rising commodity prices, Kraft has decided to increase prices across 45% of its product portfolio to support margins in the current environment. The company raised prices for its cheese portfolio in a range of 5%-12% since March and announced a 10% price increase across its Oscar Meyer cold-cuts segment by the end of May.

Kraft has yet to announce a price increase for its coffee portfolio, which is expected in the ongoing second quarter or early third quarter of 2014. The price increases intended to address commodity inflation and protect margins could challenge the company's sales volume. Also, it might impact the company's market share in the short term.

However, Kraft needs to increase its advertisement and marketing spending to support its sales volume in response to price increases. Also, Kraft's efforts to improve productivity and expand margins will help to offset the impact of commodity-cost inflation and price increases in the medium-to-long term. In the short term, the company's sales volume and margins might be challenged.

Dean Foods, the largest U.S. milk processor, is another company that has been facing challenges because of rising dairy prices. Raw milk prices have reached an all-time high, increasing 22% year over year in the first quarter of 2014. Also, higher milk prices have adversely affected fluid milk volume in the U.S., which dropped by 2.1% in the first quarter of 2014. Higher commodity prices and competition have been negatively affecting Dean Foods' performance in recent quarters.

In the first quarter of 2014, Dean Foods' total sales volumes were down 5.9% year over year. Also, the company's gross profit dropped by 16% year over year to $416 million, and adjusted earnings per share declined by 116% year over year to a loss of $0.05 in the first quarter of 2014. Moreover, because of rising raw milk costs, the margin between the Class I mover and retail price contracted to $1.43 per gallon in the first quarter of 2014, down from $1.58 in the first quarter of 2013.

Input costs continue to be a headwind for Hillshire. So far, the company has effectively managed through consistent and acute inflation; in the first quarter of 2014, Hillshire experienced sales and operating margin growth of 3.4% and 10.1% year over year, respectively. The company has been increasing product prices to offset the impact of input cost inflation and has signaled that additional pricing actions are required in upcoming quarters. As pork retail prices increased to a record high of about $2 a pound in March as compared to $1.40 in the corresponding period last year, the company increased prices on Jimmy Dean sausage and Ball park hot dogs.

Despite this fact, Hillshire observed sales growth in the recent first quarter; sales volumes were down 3.2% year over year. As the company continues to increase the prices of its products in the current inflationary environment, this continues to adversely affect sales volume and could also impact the company's margins.

Final take
The current situation of rising commodity prices remains a headwind for companies, as price increases could in response challenge sales volumes in upcoming quarters. In the current industry environment, marketing and advertisement spending needs to be pumped up to support sales volume growth. The rising costs and marketing initiatives adopted by companies are likely to keep margins under pressure in the short term.

Warren Buffett just bought nearly 9 million shares of this company
Imagine a company that rents a very specific and valuable piece of machinery for $41,000... per hour (that's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report details this company that already has over 50% market share. Just click HERE to discover more about this industry-leading stock... and join Buffett in his quest for a veritable landslide of profits!

  

Furqan Asad Suhail has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers