Why are costs rising?
- Bulk contract prices for coffee, milk, sugar, wheat, oats, peanut butter and orange juice have jumped 28% on average from 2019 levels.
- Wheat prices have risen 16% and corn is up by 60% since the start of 2020 due to ‘strong demand from China, stockpiling of grains by governments since the outbreak of Covid-19 and dry weather in key exporting countries’. Struggle to meet demand for one type of grain then puts the same pressure on alternative grains. Oats prices are up 27%.
- Soya oil is up by almost 90% since the start of 2020 and soya beans by 60% due to poor weather conditions in South America and America's Midwest, and increased demand from China.
- Average pork prices are up by 57% from 2019 as pork farmers have been affected by rising cost as they rely on soy and corn to feed their animals.
- Global export prices of butter have increased by more than a third over the past year while the cost of milk has risen by 12% since 2019 following a strong appetite for dairy from China. Milk prices are predicted to hit record levels next year.
- Average sugar prices are up by 36% from 2019 and 25% since the start of 2020 due to drought in South America.
- Rice flour – a common ingredient in baby food, desserts, soups and stews, coatings and batter as well as gluten-free foods – is experiencing a shortage in Europe due to problems in the Middle East.
What does this mean for brands and how will they respond?
Kimberly-Clark raised the price of its Scott toilet paper, Huggies nappies and other everyday goods by 4 to 9% at the beginning of June.
General Mills said that it was ‘facing increased supply-chain and freight costs’ and ‘preparing to raise prices to offset inflation’. Reckitt Benckiser, Unilever, Kellogg’s, Danone and Mondelez are among others which have also confirmed price increases.
According to Bruno Monteyne, analyst at Bernstein, ‘powerful brands in premium or growing segments of the market will quickly get more expensive’ while ‘those with weak brands in highly commoditised categories find it hard to differentiate themselves from private label and me-too brands.’ Additionally, ‘being the first to raise prices will mean being disproportionately affected’.
Brands will need to improve and diversify their product portfolio so as not to increase prices, offset increased prices or by virtue of increasing prices.
Companies will have to offset cost rises by other means. Nestlé, which has said that ‘the main way to address input cost inflation is through price increases’, will look at ‘productivity gains, industrial efficiencies and product mix and innovation’.
Brands will reformulate products to save money by replacing ingredients that have high rising cost with cheaper alternatives. Then, will need to gain new customers by investing in marketing.
Procter & Gamble, which is due to raise prices of some items in September, said in an article for CNBC that it will look to retain its market share ‘by trying to increase consumers perception of the value of its products and by introducing new or upgraded items.’
When brands within the same category increase prices across the board, they will have to work to differentiate themselves from competition to retain customers and gain new ones, and to stop them from switching to own-label products or hitting the budget supermarkets. It is yet to be seen how cash-strapped consumers will react as we emerge from the pandemic. As non-essential retail and leisure outlets reopen NielsenIQ data found that ‘total retail till sales fell 2.7%, while grocery sales decreased by 6.7% in the four weeks ending 22 May’. ‘Spend per visit has fallen to £17.40 from £21.50 in May 2020, as shoppers spent more in travel outlets and other ‘food to go’ establishments.’
Brands need to find a channel of negotiation with consumers by showing them they are providing more than just a product, and thus make them believe that they are getting a fair deal for paying a higher price. Consumers are willing to pay more for things they can feel good about, for example those brands with green credentials.
Brands will revamp packaging
Those not passing on costs to the consumer will still need to find ways to save money. One way for brands to offset rising costs is to use less packaging. If such innovations are required, this could come with an overall redesign of packaging alongside communications to strategically position the change as an environmentally friendly one. Brands may be looking to partner with design, branding and PR agencies to showcase what are essentially cost-saving measures in a more glamourous light.
Here are some brands in ALF that have already made changes and their competitors to look out for as likely to make similar moves:
Product mix and innovation has already started to become evident with Hovis unveiling a new premium bread range promoted by Michelin-starred chef Tom Kerridge. The new range includes new half cob loaves, premium burger buns and Cheddar cheese-topped rolls.
As usual, brands will be looking at what their competitors are doing, particularly in such a price-sensitive environment. Fellow bakery Warburtons is also trying to dip into premiumisation by bringing George Clooney on board for their latest marketing campaign. The business has recently announced an expansion of its facilities for non-bread products such as crumpets and bagels, so expect more diversification of the company’s portfolio in these categories. In May, the brand also moved into luxury sweet treats with Ellie Warburtons Cakes.
Look out for similar changes at the likes of Kingsmill which rolled out its new and unique seeded 50/50 loaves; Allinson which recently appointed a PR agency specifically to showcase the brand's 'quality credentials' with the aim of capitalising on the growth of the premium bread market; Roberts Bakery which appointed a new Managing Director towards the end of 2020; or Deli Kitchen which unveiled new packaging for five new wrap products earlier this year after seeing sales grow by 78% in 2020.
Average coffee prices are currently up by 52% from 2019 due to shipping delays tightening the availability of coffee beans and rising costs for roasters and cafés. Arabica coffee is at its highest price in more than four years due to drought in Brazil, the world’s largest coffee producer, further squeezing supplies. Due to raise its prices, coffee brand owner Nestlé has added a premium version to its Nescafé Gold Blend range. The Roastery Collection in light and dark roast variants launched in the UK in May and emphasises the company’s ‘innovative roasting process’ with ‘research and development taking place in Switzerland’. The company is also rolling out Nescafé Azera My Way Latte and Nescafé Azera Craft Coffee. Nestlé will also be looking to capture customers who have got used to the barista coffee experience at home thanks to coffee machines and the prevalence of coffee pod subscription services which will also become more expensive.
Despite charging them more money for essential products for their babies, Kimberley-Clark is aiming to help new parents in the US with its Huggies ‘Hand to Hold’ mobile app specifically aimed at parents to new-borns in ICU. Huggies also rolled out biodegradable Pure baby wipes in the UK, aiming to make up for what it may lack in competitive pricing.
Strategic changes may come from other brands in the baby category due to the rising cost of rice flour and milk, and the lockdown baby boom. Look out for changes at brands such as Organix, SMA, Aptamil, Cow & Gate, Kiddylicious and Heinz. Cow & Gate last called a statutory review of its digital and CRM business in 2018.
With the average price of orange juice up 11% from 2019 and up 20% since the start of 2020, Tropicana is looking to broaden its horizons. It has recently rolled out Piña colada, Caribbean sunset, summer berry bliss and strawberry kiwi sunrise juices as it is looking to tap into the cocktail mixer market by enticing customers with exotic new flavours.
Coca-Cola is another brand set to raise prices to offset commodity costs. There will be prices hikes across the likes of Coca-Cola, Diet Coke and Sprite, and a return to a push on smaller cans and bottles after a period of focusing on bulk buys for those staying at home during the pandemic. Smaller cans ‘usually carry a higher price per ounce for the consumer and are more profitable for the manufacturer.’ Diet Coke recently launched a new campaign bringing back its 1982 jingle remixed by singer and songwriter Thundercat. The sparkly, funky and retro campaign created by Droga5 to resonate with Gen Z and millennials, and to divert their attention from the rising cost of their favourite fizzy drinks.
Also see Funkin Cocktail Mixers; Ribena which has just unveiled its Sparkling range; Lucozade which has rolled out Lucozade Zero Tropical and Lucozade Zero Pink Lemonade in can formats; J2O; Rubicon which recently moved into energy drinks; and Innocent which rolled out 30% less sugar Super Smoothies Light earlier this year.
With pork brands faced with raising costs alongside competition from the fast-growing meat-free market, expect these brands to be investing in NPD, innovation to create healthier meat products, or marketing to emphasise environment or social purpose. Meat brands will also increasingly be branching into meat-free alternatives in the footsteps of Richmond and Birds Eye. Keep an eye on Kepak’s Rustlers, Pilgrim’s Pride (which has just acquired Richmond), Unilever’s The Vegetarian Butcher, Finnebrogue Artisan and Wall’s & Heck.
How can you help?
As a result of the rising cost of commodities, there will be a lot of activity from household brand names in the coming months. What services can your business provide to brands looking to showcase a new product mix, renew brand perception with new campaigns, redesign and redevelop packaging, or highlight sustainability initiatives? ALF can show you the contacts you should reach out to.
By Natalie Fedden
Senior Content Executive, ALF
ALF helps you to:
- Tailor your approach with news and insight
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- Reach out to all the decision-makers that will be involved
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