High Food Prices Hit Hard

Of all the economic legacies of the pandemic, generationally high food price inflation may have the most impact. Even the tight housing market or the cost of filling up the gas tank has not triggered as much fallout among consumers as elevated prices in grocery stores and restaurants.

Persistently high food inflation has even become a political issue, remaining such a drag on consumer spending it ranks as Americans’ leading “kitchen-table” concern for this year’s presidential campaign. Food costs were the top inflation worry of 67% of respondents in a recent Yahoo Finance-Ipsos survey, compared with just 15% for gas and transportation costs and 12% for housing. And among voters, such economic concerns far outstrip any other basket of issues, such as immigration or geopolitical turmoil.

One clear example of how top of mind food inflation has become is the tempest that arose when it appeared that Costco’s $1.50 hot-dog-and-soda deal might be endangered. When the $242 billion company reined in the 38-year-old loss leader by restricting the deal at outdoor food courts to card-carrying Costco members, social media blew up.

New Costco Chief Financial Officer Gary Millerchip, in one of the first important official acts in the job he took over earlier this year, even had to make assurances about the deal a focal point of his quarterly earnings call in May. “To clear up some recent media speculation,” Millerchip told investors, “the $1.50 hot dog price is safe.”

Costco’s stand became a minor win for American consumers who have been stressed by food prices that have risen dramatically since the pre-COVID era. In March, grocery prices were up by 26% over 2019 levels, while fast food prices were 33% higher.

“Food and gasoline are the highest-frequency expenditure items in consumers’ baskets, and people are especially sensitive to their prices because they buy them all the time,” says Michael Swanson, chief agricultural economist for Wells Fargo. “We went through a period of time, from 2015 to early 2020, where, realistically, we had literally had no food inflation.

Perspectives on Prices

“So consumers looked at that as normal, and any pay increase or income gains they could apply to other things, like a trip to Disneyland or a nicer iPhone, and they were happy about that,” Swanson continues. “People have memories of what they think prices should be, and if it’s not that, they take higher prices as unfair. If it’s a price drop, they say, ‘Great, thanks.’”

In response, many consumers have cut back food purchases, shopping frequency, and eating-out occasions. U.S. grocery sales of food and beverages fell 2% by volume for the 52 weeks ended April 20, 2024, compared with the year-ago period, according to NielsenIQ, while U.S. fast-food traffic declined 3.5% in the first three months compared with 2023, according to market research firm Revenues Management Solutions.

Consumers also have begun demanding more promotional pricing. Fifty-five percent of shoppers told Circana recently that they’re looking for sales and deals more often in addition to clipping coupons and  taking other cost-saving measures. They’ve also flocked to cheaper private label lines, which last year claimed 22 cents of every U.S. grocery dollar, the highest share ever.

Corporate reporting reflects all of this. Kraft Heinz, for instance, reported that first-quarter organic net sales dropped 0.5% and volume fell 3.2% while it was raising prices by 2.7%. But CPG companies haven’t been sitting still. They’ve introduced more value-price options, including multipacks. And they’ve been reducing package sizes with “shrinkflation” to minimize actual price increases.

“This isn’t necessarily a new phenomenon, but companies are trying to keep prices in check, to at least have opening price points for consumers who can’t afford larger sizes,” says Sally Lyons Watt, executive vice president and leader of client insights for grocery data provider Circana.

Retailers, too, have reacted, with Target cutting prices on thousands of everyday CPG products for the busy summer season, and Walmart introducing a new line of 300-plus private label products under the bettergoods banner. Meanwhile, discount retailer Aldi has leveraged a humorous television advertising  campaign in which consumers refuse to believe that its everyday low prices don’t comprise a “sale.” Measures like this have allowed Aldi to achieve a 26% increase in foot traffic in its nearly 2,400 U.S. locations, robustly outpacing the gains of every other grocery chain.

On the foodservice side, McDonald’s consumer traffic declined in the first quarter in comparable stores, and management expects it to be negative for the full year. So the leading fast-feeder is rolling out a limited-time $5 meal bundle that includes four items: a McDouble or McChicken sandwich, small fries, small soft drink, and a four-piece Chicken McNuggets.

“Pricing always has been higher in restaurants than in retail,” says Rich Shank, senior principal for foodservice consultancy Technomic. “But there’s a risk of consumer acceptance of that going away if the industry doesn’t normalize this year.” Rising labor costs are a constant pressure, and growing patron resistance against tipping inflation—which roared during the pandemic—is part of the pushback, he says.

The largest price increases in both supermarkets and restaurants came during 2021 and 2022, and much of consumer frustration stems from the suddenness and magnitude of those hikes. Americans mostly are unforgiving that what seems to be a permanently larger chunk of their household budgets must now be devoted to food purchases. And while food inflation has moderated somewhat in 2024, it has continued.

“Consumers have a broader time horizon,” wrote MIT management professors Robert Pozen and S.P. Kothari recently in The Wall Street Journal. “Prices are up, wages aren’t keeping pace, and the tuna sandwich that used to cost $10 now costs $13, including a small tip. No wonder consumers feel they are still battling price inflation.”

How It Started

How did this happen? And why does it still seem out of control? Supply chain breakdowns and general economic disruption during COVID (remember toilet paper hoarding?) kicked it off. “There was a sense of obligation to make sure product was available, but manufacturers were producing stuff in some cases at a loss,” says Ken Harris, managing director of Cadent Consulting Group. “They knew they were going to need to recoup those losses.”

Most supply chain snarls have disappeared, but not all. Meanwhile, many commodity prices, including sugar and seed oils, have remained elevated because of the Ukraine war. The price of cocoa on world markets has increased by 400% over the last year. High cocoa prices are expected to persist after a combination of low rainfall, plant disease, and aging trees led to a disappointing crop in Ivory Coast and Ghana in 2023; the two countries produce about two-thirds of the world’s cocoa.

Nuts.com has been hit by chocolate prices as the e-commerce pioneer increasingly expands into grocery retail with its eponymous snack brand as well as its Kopper’s chocolates. “These are unprecedented cost levels we are dealing with, so we are working with retailers, and there are places where we’re taking margin hits and places where we’re working with customers on other solutions, such as different package sizes,” says PJ Oleksak, CEO of the company.

Indeed, there’s also inflation stress at the retail level, where purchases by lower-income consumers have been hindered over the past year by a post-pandemic reduction in U.S.  Supplemental Nutrition Assistance Program payments, beginning in early 2023.

“Grocery stores cannot simply reduce the prices they charge while the prices they themselves pay continue to rise,” says EJ Antoni, a research fellow and public finance economist at the Heritage Foundation. “Over the last three years, firms have been slow to pass along the full freight of cost increases to consumers as those businesses sought to maintain market share. Only [recently] has the increase in prices paid by consumers finally caught up to the higher prices paid by businesses.”

Consider how inflation has wracked the ice cream category. “Brands and manufacturers took three or four price increases from 2021 through 2023,” says John Crawford, senior vice president of client insights for dairy with Circana. “Those were big price increases, and one on top of another to keep up with inflation. So we’ve seen consumers struggle across the whole dairy category to try to understand what is a normal base price anymore. ‘What are we supposed to be paying for this? What is a good deal?’”

Reaching the Limit?

“There’s no room for brands to take more price increases,” Crawford says. “Consumers are tapped out. Some [brands] are taking price decreases as some commodity prices have started to soften. They’re going to be using promotion to drive volume and unit sales in 2024.”

Graeter’s, for instance, sells its hand-packed “French pot” ice creams through grocery stores and its own 55 parlors. “Our last price increase was in November 2022, about $1 at retail” on pints, to $6.99 typically, says Shannon Sherrard, vice president of sales for the company. “But we hadn’t had a price increase in almost 10 years. And our labor is through the roof.”

But while consumer pricing has stabilized somewhat in the ice cream category very recently, that’s not enough for consumers. “They want a rollback in prices, and producers don’t want to give it back,” says Mark Webster, vice president of sales for flavor supplier T. Hasegawa.

All of this recalls an early episode of shrinkflation in the ice cream business. Fifteen years ago, General Mills’ Häagen-Dazs brand cut the size of its “pint” of ice cream to only 14 ounces and was called out on it by rival Ben & Jerry’s, owned by Unilever. Häagen-Dazs justified the move by pointing to rising input costs, but Ben & Jerry’s, vociferous as always, couldn’t resist tweaking its rival.

“We understand that in today’s hard economic times, businesses are feeling the pinch,” Ben & Jerry’s said in a statement. “We also understand that many of you [consumers] are feeling the same, and think now more than ever you deserve your full pint of ice cream.”

While both have raised prices dramatically over the last couple of years, Ben & Jerry’s pint is still 16 ounces—and Häagen-Dazs’s is still 14 ounces.

Maybe Ben & Jerry’s will begin highlighting this difference again, because CPG companies are going to have to use greater promotional activity to keep chipping away at higher list prices that they aren’t easing.

“Unit volume is in really bad shape, but manufacturers have to hit bottom-line numbers, and the way to do that is promotion using trade dollars, feature displays in the store,” and so on, Harris says. CPG companies could “do more online, but [e-commerce is] still only 5% to 6% of their sales, not enough to move the needle.”

CPG and restaurant executives are hoping that all of their maneuvers and underlying macroeconomics will mean this issue dwindles soon. Circana, for one, predicts grocery sales volume will continue to recover this year and end up increasing for all of 2024.

“The U.S. consumer remains in good shape,” Coca-Cola CEO James Quincey said on the beverage giant’s most recent earnings call. “There is some purchasing-power compression in the lower income echelons [and] some behavioral shifts there looking for value.” But such shifts are “at the periphery,” Quincey claimed.

But not so fast, per McDonald’s. “The macro headwinds have been more significant than I think we even anticipated coming into the year, and we continue to see those macro headwinds as we have started quarter two,” says Executive Vice President and Chief Financial Officer Ian  Borden. “Consumers are experiencing high prices “across their full baskets of goods and service.”

Longer-term factors also could create new pressures that impact food prices. “Climate is dramatically affecting agricultural business,” says Stephen DeAngelis, president and CEO of Enterra Solutions, a provider of supply chain software. “Climate change is a real thing, and climate is affecting crop yields.”ft