Consumer giant warns of rising input costs and pushes prices up to protect margins

Some of the world’s biggest consumer brands have warned of rapidly rising input costs they are passing on to customers to protect their profits as rising inflation pushes up costs for households.

Executives say American consumers, supported by higher wages and savings, are so far more willing to spend.

Companies including PepsiCo, McDonald’s and breakfast cereal maker Kellogg have all highlighted the impact of increased labor, transportation and commodity costs as well as the pandemic’s disruption to supply chains and workforces. number of employees during the most recent corporate earnings season.

“US businesses have done something that has never been done before, which is to combine four-year price increases into one,” said David Rosenberg, chief economist and strategist at Rosenberg Research. , chief economist and strategist at Rosenberg Research said.

New price pressures come as inflation is accelerating around the world. At the start of this year, the US consumer price index recorded its biggest increase since 1982, data published on Thursday shows, as the cost of food, clothing, transportation and medical care continues to rise.

Soaring prices and doubts about the US government’s economic policies have pushed consumer sentiment to its lowest level in more than a decade. Nearly half of consumers surveyed by the University of Michigan expect their inflation-adjusted income to decline in 2022.

The cost shift helps show why blue-chip companies in the S&P 500 stock index are estimated to achieve a net profit margin of 12.7% for 2022, compared with a five-year average of 12.7%. 10.5%, according to data provider FactSet.

McDonald’s raised menu prices by 6% in 2021, and the burger chain predicts that the cost of its food, paper and other items will double this year.

Beverage and snack company PepsiCo expects more price hikes in 2022 after experiencing higher costs for cooking oils, packaging materials and other items.

Kellogg has found the price hike to have a smaller-than-normal demand reduction effect, but chief executive Steven Cahillane predicts that will change. “Clearly, inflation continues to run rampant,” he said at Thursday’s conference call.

Dan Suzuki, VP of investment at Richard Bernstein Advisors, said that while it’s easier for dominant firms to weather price increases, “the big driver is the state of balance sheets of financial and regional consumers. financial buffer they have. companies have tremendous pricing power”.

Whirlpool, whose products include refrigerators, stoves and washing machines, said it offset $1 billion in raw material inflation by raising prices in every region where it does business.

Boot Barn, whose store sells cowboy boots, hats and other clothing, said it ran out of stock as vendors raised prices themselves. James Conroy, CEO of Boot Barn, told analysts: “We have decided to maintain our margin.

Line chart of year-over-year % change in US CPI shows US inflation at 40-year high

Under Armor, the sportswear brand, on Friday reported a record 50.3% gross profit margin in 2021 but said it will decline this quarter in part due to “higher shipping costs due to ongoing Covid-19 supply chain challenges”.

Higher prices complicate President Joe Biden’s economic agenda. His administration has tried to delegate some responsibility to industries that government officials say are over-focused – meat packer special.

Tyson Foods – America’s largest meat producer – reported this week that the price of its beef rose 32% year-on-year in the previous quarter, while chicken increased 20%.

Higher prices make it harder for the poorest Americans. Chairman of the Federal Reserve Jay Powell said last month that “high inflation is exactly a toll” on people struggling to pay for essentials like food, housing and transportation.

However, rapid wage growth, rising home prices, a rising US stock market and pandemic-era policies have bolstered households’ balance sheets, and “consumers have ample opportunity to prepare exposed to the upside,” said Patrick Palfrey, senior equity strategist at Credit Suisse.

Companies across the Atlantic have also acknowledged the effects of persistently high inflation in recent earnings reports. Unilever Consumer Group said this week It expects the strongest cost inflation in decades to hit a profit in two years.

L’Oréal, the world’s largest cosmetics manufacturer, guess supply chain challenges and inflationary pressures caused by the pandemic will subside from the middle of this year.

While many large companies have successfully managed to raise prices for consumers, there are signs that some smaller companies are struggling.

Cooper-Standard Automotive, a Michigan-based auto parts distributor, warned last year that it could not offset the impact of inflation. Its $400 million bond maturing in 2026 fell from more than 95 cents on the dollar in July 2021 to about 75 cents on the dollar this month, ahead of financial results. expected next week.

“I think we’re starting to see a lot of individual companies struggling with inflation,” said Ray Costa, head of debt investing at Benefit Street Partners.

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