Bracing For Higher Costs Of Living

Over the last 12 months, the food index has risen 1.8 percent with the food at home index up 2.1 percent.  Both 12-month changes are the highest since 2009.  This is no surprise to anyone that has shopped at the grocery store in the past two weeks.

Typically, manufacturers and retailers tend to hold the line on price increases during an economic downturn, but now, because of the increased cost of cotton, wheat, corn and soybeans, price increases are inevitable on almost everything we use.

On top of food prices, the political unrest in the oil-rich Middle East will nearly ensure that we’ll see gasoline prices in the $4 to $5 range by mid-summer.

From an agricultural marketing perspective, these events are both good and bad.  Crop farmers are finally realizing good profits but are faced with a very volatile market and increased energy costs.  Livestock producers are reducing stocks, based on high input costs, and will attempt to maintain margins and profits on market prices but with reduced herds.  In terms of productive agricultural land values, a record-high $9,000/acre was just paid for corn/soybean land in Central Illinois.

For consumers, everything from food to underwear will inevitably increase in price.  Hanes has informed its retailers that they want to reserve the option to employ price increases every 90 days if necessary.  Kraft which makes Oreo Cookies, Wheat Thins and Oscar Mayer wieners, has raised prices on more than half its North American products and plans on more increases.  The Coalition Against Hunger is predicting that rising prices will drive more families to food pantries and soup kitchens.

This situation is not just limited to the United States.  Higher food and fiber costs are being felt world-wide. (Note that the initial unrest and uprising in Egypt was based on the cost and accessibility of food in that country.)

How will consumers change their purchasing behavior when faced with a higher cost of living?  We suggest two dynamics will occur:  1) Less expensive and less nutritional processed food products will increase in demand; 2) Consumers will become even more discretionary in their premium food selections.

From a marketing perspective, several changes will also occur:

• Brands will offer products in smaller packages – from half-loaves of bread, 12 oz. packages of cereal to 4 oz. packages of cured bacon
• Brands may have to reduce the number of SKUs (a historical first) to focus on the manufacturing efficiencies of their baseline products
• Retailers will look to alternative sources for fresh products – including growing their own leafy produce in greenhouses or on the rooftops of their own stores
• Premium brands will need to further justify their price and differentiate themselves from the competition

Regardless of what the future holds, it is even now more critical for food brands to stay in touch with their consumers with frequent market research that will lead to successful market planning.