Food industry CFOs are battling back against soaring ingredient and input costs by raising prices, retooling contracts and continuing to pursue digital initiatives like AI to offset inflation and drive performance.
While inflation eased more than expected last month with the consumer price index (CPI) rising 8.5% in July after increasing 9.1% on an annual basis in June, food prices surged 10.9% — the biggest gain since 1979. The increases this year have driven companies in restaurants, grocery store and other food-related spaces to adjust their strategies, according to finance chiefs speaking on second quarter earnings calls.
“...Obviously, we've all been in a very unprecedented environment relative to pricing, and that's required us to sort of rethink traditional contracts,” International Food & Fragrance CFO Glenn Richter said on the company’s Aug. 9 earnings call. “And the way we've been rethinking them is, to some extent, just having realistic discussions with our customers.”
The New York-based ingredient maker is shifting to draw up more frequent or “open agreements” in order to respond more quickly to price changes rather than semi-annual or annual contracts. Likewise, beverage brand Coca-Cola Company is also looking at its relationships with supply partners to streamline the way it does business as a means of mitigating upcoming inflationary pressures, CFO Dive reported.
Price increases are an obvious offensive tactic that CFOs have turned to in order to offset hiked prices that they have to pay their suppliers. IFF is squarely in that camp and is on track to recover approximately $1 billion for the full year in cost inflation by raising prices, Richter said on the call.
But companies also risk lower sales if that tactic backfires and customers simply walk rather than pay up.
Those with business models anchored in affordability like Bentonville, Arkansas-based Walmart, with its “Save Money, Live Better” slogan, have to be careful when raising prices. Company executives described a varied approach to pricing on the retail giant’s Aug. 16 call, saying the firm seeks to hold down or roll back what it charges for certain items — particularly in its private brand food and consumable categories — while also selling higher priced items.
Walmart is adjusting certain prices to reflect inflation and higher supply chain costs, while also managing them in a way that “preserves its price gaps and allows us to earn market share profitably,” Walmart CFO John David Rainey said on the call.
Executives at Chicago-based fast-food chain McDonald’s are also in that camp as executives discussed the need to balance cost pressures with making sure they’re providing value customers expect at their restaurants.
This year “we’re taking smaller, more frequent price increases, because it gives us the flexibility to be able to see how consumers are reacting and then adjust if or when necessary,” CFO Kevin Ozan said on the McDonald’s July 26 earnings call.
Robots in the wings
Finance chiefs also discussed their views of technology as another lever to drive performance — and in one case a potential solution to wage inflation — on recent earnings calls.
McDonald’s Ozan estimated that the company was probably seeing labor inflation at a little over 10%, partly due to strategic wage rate increases at company-operated restaurants last year. But McDonald’s CEO Chris Kempczinski said he did not see robots and automation being a “broad-based solution anytime soon” to the company’s labor needs, although he acknowledged that the company has spent a lot of time and money looking into it.
In contrast, digital strategy and AI was a strong focus of the Yum! Brands Aug. 3 earnings call. CFO Chris Turner said the company exceeded its previous guidance with core operating profit down 1% despite double-digit labor and commodity inflation. He also said the company was using data and analytics experts, along with an AI marketing analytics team acquired last year, Quantum, to drive performance.
They are “currently partnering with Taco Bell and KFC U.S. to test and deploy an inventory management tool that helps our restaurant managers more accurately forecast food and supplies,” Turner said on the call. “Based on encouraging early results, we plan to scale this platform throughout the remainder of the year.”