The Supply Side: Walmart will continue to work with suppliers amid inflationary pressures

by Kim Souza ([email protected]) 1,994 views 

More than a full year into the COVID-19 pandemic, many food and consumer packaged goods (CPG) manufacturers are hinting at raising prices for commodities such as diapers, toilet paper, cereal, peanut butter, poultry and other meats.

Procter & Gamble, one of Walmart’s largest suppliers, recently said it would begin raising prices this fall on household items like diapers and toilet paper. It cites rising raw material costs and climbing transportation expenses because of higher fuel prices and tighter freight capacity.

Dallas-based Kimberly Clark said March 31 it would raise prices in its Northern American business unit. The CPG giant said the increases are necessary to help offset high commodity inflation costs.

“The percentage increases are in the mid to high single digits,” the company noted. “Nearly all of the increases will be effective in late June and impact the company’s baby and child care, adult care and Scott bathroom tissue businesses.”

Higher commodity costs for grains have already pushed food companies such as Hormel to raise prices on Jennie-O ground turkey, which took effect earlier this year. Nielsen recently reported bacon was 8.3% more expensive in March than in January 2020, well ahead of the pandemic. Ground beef is almost 5% more costly, and a loaf of bread costs on average 22 cents more than it did a year ago.

Stephens Inc.’s analysis shows rising energy costs, which impact retailers and suppliers, leading the inflationary pressures as wholesale crude oil prices are up 261% in late April, compared with a year ago. Wholesale gasoline prices are 57% higher in April than a year ago.

Corn, wheat and soybeans are also pushing prices upward. Corn prices are up 119% from April 2020, soybean prices are up 87% year-over-year, and wheat prices are up 17.6% in the past two months. When grain prices rise, meat and dairy prices follow suit. Chicken prices are up sharply year-over-year, with wings up 181% and boneless, skinless breast meat up 140% from April 2020.

Tyson Foods has said it plans to recoup some of the higher costs in the fall with price increases to its retail and wholesale customers.

Longtime Walmart supplier J.M. Smucker Co. said higher grain costs forced a recent price hike for Jif peanut butter, and its pet products line will see price hikes to offset rising shipping costs and other inflationary pressure.

Kofi Bruce, chief financial officer at General Mills, said in the company’s March 24 earnings call that the company will soon raise prices on cereals. General Mills said higher input costs resulted in a drag on gross margins 1.16% lower than analysts expected in the fiscal third quarter and 2% below the prior quarter.

The Coca-Cola Co. also plans to raise prices on some of its drinks to pass along some inflated commodity prices. CEO James Quincey told analysts that pressure is building, and price increases are likely in 2022.

Food analysts with Bernstein remain doubtful that General Mills and other food companies will fully offset the higher input costs of grain prices and higher transportation costs.

According to the April 13 report from the U.S. Bureau of Labor Statistics, inflation is rising. It indicated a 2.6% rise in the Consumer Price Index for the 12 months ending March 2021. The agency said it was the most significant over-the-year increase since August 2018. Food prices increased 3.5% over the past 12 months, and energy prices increased 13.2% in the period. Inflationary prices for non-food and energy rose 1.6% in the period.

Mark Lambert, an agri-economist with Arkansas Farm Bureau, said inflationary prices in grains and fuels show no signs of abatement. He said grain futures pricing is being buoyed by more export demand from China for soybeans. He said more corn is being used for ethanol blending as consumers begin traveling more.

“Every company that has products on retailer shelves is also paying more for shipping and transportation costs, and that’s going to mean inflationary pricing across the board for some time. Most large food companies have likely locked in some grain pricing through this summer. It could take roughly a year for the higher commodity prices today to flow through to the grocery shelf,” Lambert said.

Analysts with Kearny Consulting believe that as the economy slowly strengthens and consumers have stimulus funds to spend, most retailers are likely to pass price increases on to shoppers.

Walmart CFO Brett Biggs told the investment community in February that Walmart continued its price gaps against competitors.

“We’re going to continue to be the price leader in markets,” Biggs said. “It’s really important to what we do. It’s important to our customers, and it’s part of who we are as a company. But we’re going to be thoughtful about it. We’re going to be strategic about it.”

He said there would be difficult times for families this year. And Walmart has a history of creating rollbacks and lowering prices, and plans for more are in the works.

Biggs said in March that Walmart is watching input costs and works with suppliers when prices rise. He said they consider how the product might change and make it less expensive without jeopardizing quality. Biggs said conversations with suppliers happen product-by-product to keep prices as low as possible for customers.

“That’s what we’ve always done, and we’ve managed to, I think, do that better than anyone has,” Biggs said.

Walmart forecasts adjusted net sales to grow in the low single digits in fiscal 2022, which ends Jan. 31, much lower than the 8.5% growth seen in the preceding year. It also expects earnings per share to be flat or slightly up, below the 2.2% growth analysts had been expecting.

Steve Montgomery, president of B2B Solutions consultancy, said retailers would try to follow the traditional game plan of cutting costs where they can, perhaps reducing the number of items sold and trying to avoid raising prices on their essential value items.

“The challenge of cost-cutting will be hampered by increased wages coupled by changing consumer purchase habits that require additional labor on the part of retailers,” Montgomery said. “All of this will be taking place in an environment where the economic recovery has bypassed far too many people. I expect it will be a very difficult year.”

He also warns that conventional grocers are at risk of losing market share to discounters as price increases and reduced package sizes are implemented in the back half of this year.

EDITOR’S NOTE: The Supply Side section of Talk Business & Politics focuses on the companies, organizations, issues and individuals engaged in providing products and services to retailers. The Supply Side is managed by Talk Business & Politics and sponsored by Propak Logistics.