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News

Inflation pressure: how are the major food groups reacting

22/10/2021 - François-Xavier Branthôme
"We are raising prices, where necessary, around the world"

“Continuing to work from home… will translate to higher sales of retail food”
Momentum in emerging markets, with sales up nearly 8% in the first half of this fiscal year, could continue to bolster Kraft Heinz Co. financial results for another five years, said recently Miguel Patricio, chief executive officer. Growth basically is coming from Latin America, the Middle East and Eastern Europe, he said. Emerging markets represent about 10% of Kraft Heinz net sales, but they offer “great potential and a great momentum.

Domestically, Kraft Heinz could continue to benefit from at-home eating. More consumers may continue to work at home once COVID-19 subsides. “And that has, of course, consequences on consumption when you compare with pre-pandemic,” Mr. Patricio said. Inflation and rising input costs probably will continue, too, all the way into 2022. Kraft Heinz has implemented pricing and other revenue management initiatives to deal with inflation.

 Kraft Heinz raises prices on 2/3 of portfolio, 'but that is not the only thing we are doing' to offset inflation
Like many CPG players, Kraft Heinz has leaned heavily on pricing to offset inflationary pressures, and is willing to do so again, executives said.
Kraft revealed that it has increased prices for about two-thirds of its portfolio, representing about 4-5% net pricing, "but that is not the only thing we are doing," said Carlos Abrams-Rivera.
He explained that the company is "using the full revenue management system," including strategies such as price-pack architecture, and instituting "a design to value focus in our brands." Abrams-Rivera explained this involves ensuring that products have the right ingredients, the right pack size, the right materials and agile ingredient formulations to better weather inflation.
Mr. Patricio said the firm was also spending significant sums on developing new packaging to meet its aims on reducing plastic waste. Most of the 650 million bottles of ketchup the firm sells every year are plastic, for example. But Kraft Heinz CEO said the firm was "encouraging" customers to buy glass bottles even though they are less convenient "because you have to tap on the bottom".

Finally, Kraft Heinz is offsetting the negative impact of inflation by strengthening the resiliency of its portfolio through renovation to ensure that products meet modern consumer needs.
Year to date we have renovated about 45% of our portfolio, and by the end of 2022 that number will be 90%, which means that as we go through this, we're also making sure that our portfolio is stronger,” he said.
While CFO Paulo Basillo said he is "very confident” the pricing Kraft Heinz has taken so far is enough to "protect our margin and deal with the inflation we are seeing today, and also protect us with carryover inflation in 2022," he added that the company is open to raising prices again if inflation continues to rise.
If another round of price increases is necessary, Abrams-Rivera said the company would ensure that consumers can still access the products they love by offering select promotions and restoring key retail activations, such as back-to-school events happening now.

The executives' confidence in the company's ability to pass inflation through to consumers also is reinforced by its sustained strong market share gains and brand performance, which is up 58% in the US in the second quarter,
"Share performance is certainty encouraging," as is household penetration which is up 70% from 2019 and repeat purchase rates that are up 73% from two years ago, Abrams-Rivera said.
He attributed part of this to the "new normal" of eating more at home - whether that be more snacks or looking for ways to recreate at home the restaurant experience. And while more Americans are returning to offices, schools and other obligations out of the home, he said, many people will continue to work from home at higher rates than before the pandemic, which will translate to higher sales of retail food. 

Kraft Heinz says people must get used to higher food prices
Kraft Heinz chief executive, Miguel Patricio

The cost of ingredients such as cereals and oils has pushed global food prices to a 10-year high, according to the UN Food and Agriculture Organization. People will have to get used to higher food prices, Kraft Heinz’ CEO told the BBC. 

Miguel Patricio said the international food giant, which makes tomato sauce and baked beans, was putting up prices in several countries. Unlike in previous years, he said, inflation was "across the board".
Kraft Heinz has increased prices on more than half its products in the US, its home market, and Mr. Patricio admitted that is happening elsewhere too. "We are raising prices, where necessary, around the world," he said.
During the pandemic, many countries saw production of raw materials, ranging from crops to vegetable oils, fall. Measures to control the virus, as well as illness, limited output and delivery.

As economies have restarted, the supply of these products hasn't been able to keep up with returning demand, leading to higher prices. Higher wages and energy prices have also added to the burden for manufacturers. Mr. Patricio said this broad range of factors was contributing to the rising cost of food, adding that consumers would need to get used to higher food prices, given that the world's population was rising whilst the amount of land on which to grow food was not.
 
 Not all cost increases should be passed on to consumers, Mr. Patricio said. Firms would have to absorb some of the rise in costs. "I think it's up to us, and to the industry, and to the other companies, to try to minimize these price increases," he said.

But big food producers like Kraft Heinz, Nestle and PepsiCo "will most likely have to pass that cost on to consumers" according to Kona Haque, head of research at the agricultural commodities firm ED&F Man. "Whether it's corn, sugar, coffee, soybeans, palm oil, you name it, all of these basic food commodities have been rising," she said. "Poor harvests in Brazil, which is one of the world's biggest agricultural exporters, drought in Russia, reduced planting in the US and stockpiling in China have combined with more expensive fertilizer, energy and shipping costs to push prices up."

But she said food producers would all be affected and would therefore all be raising prices in similar ways: "because it's so widespread that everyone will do it, meaning they probably won't lose customers".
This week PespsiCo warned it was also facing rising costs on everything from transport to raw ingredients, and said that further prices rises were likely at the start of next year.

Sources: The Kraft Heinz Co., foodbusinessnews.net, foodnavigator.com, bbc-com.cdn.ampproject.org
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