Money Matters

October 31, 2007

3 Min Read
Money Matters

A flurry of press releases about ingredient price increases, a flood of newspaper stories about how certain foods are experiencing double-digit price increases, dire warnings from global economists if you havent noticed, the cost of food is rising. When raw materials get more expensive, something has to give: the cost of putting together the food product, the margins and/or the price charged.

I havent run a P&L analysis on a food product for a while, but I remember distinctly the impact on the bottom line a shift in the price of even a single ingredient can have. Depending on the combination of factors, it sometimes generates a modest increase, and sometimes a not-so-modest one. No matter the degree, that impact wont bring joy to the corner offices, especially when that penny or two or more a pound upcharge is amplified by a million or so pounds. Add in the rest of the incidentals, many of which are directly influenced by rising fossil-fuels costs, such as packaging, production energy, transportation and people who want raises to offset all these rising prices, and those corner offices are likely to become as cheerful as a funeral home.

So, R&D focus shifts to raw-material cost reduction, which can only go so far before product quality suffers. The same happens in processing and packaging: faster throughputs, fewer inspections, lower-quality packaging, smaller packages. Soon the problem is solved, because no one actually wants to buy the product any more.

Some articles mention that many companies have been taking a margin hit to stay price-competitive (as if this age of Wal-Martization has left a great deal of wiggle room). However, eventually some price hikes have to be passed on to the consumer. Typical well-heeled Starbucks addicts arent likely to abandon their status symbol/caffeine fix in droves for the approximately $36/year the recent price hike triggered for a daily coffee. Likewise, if Buffy and Roger are paying $35 for a bottle of truffle oil, theyre not inclined to do much more than complain over the weekend foie gras and beluga caviar canapés when the price goes to $37.50. But when the unwashed masses only have $200 to spend on a grocery cart so they can spend $50 to fill up their gas tank, price becomes a more-compelling purchase driver. But not the only one.

How to decipher the consumers priorities? ... as if the consumer was a monolithic entity. So that pint of premium ice cream may be a more-affordable monthly luxury than a trip to the salon for Ms. A, but not Ms. B. A package of store-brand cookies are an acceptable alternative to national brand O in some households, but not in others. And as for Lynn K., most days shes perfectly happy to shell out three or four bucks for refrigerated mashed potatoes that dont require an hours prep and cleaning timethough meat loaf might accompany it vs. rib roastwhile the price, as well as the concept, would appall her mother.

So, in the face of higher prices, what is the consumer going to accept? Or, more accurately, what is your consumer going to accept?

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