Consumer goods companies walk a tightrope as inflation surges

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(Businesshala) – Big global brands Pepsi and Levi Strauss told investors this week that they offset inflation with rising prices, but rising costs of everything from aluminum to cotton signal ahead for consumer goods companies.

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Freight costs and raw material prices have risen across industries this year as global supply chain disruptions, slashing profit margins for companies looking to recover from the impact of the COVID-19 pandemic, have led to a rise in the prices of raw materials.

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To mitigate the blow, PepsiCo Inc. and Levi Strauss & Co., among the first batch of consumer product companies to report quarterly earnings, have raised prices for jeans, snacks and sodas, allowing results to exceed expectations. went.

While those companies were able to pass along the cost to consumers, higher prices would be a headwind, at least until the end of the year, with some industries facing pressure until mid-2022, analysts have said.

As government data suggests inflation has started to make a dent in consumer spending, companies must balance the need to protect their margins with the risk that raising prices will hit demand for their products.

Analysts at Credit Suisse described the breadth of inflation faced by PepsiCo as “astonishing”.

“We expect margin pressure to be a major theme for the rest of this earnings season,” he added. JPMorgan’s Andrea Teixeira said PepsiCo “is feeling and will continue to feel the impact of inflationary pressures and supply chain challenges.”

But PepsiCo CEO Ramon Laguarta is confident, while the company is facing high packaging material costs and truck driver wages.

“Worldwide, consumers are looking at pricing a little differently than they used to be,” Laguarta said in an analyst call, highlighting the strength of the company’s brands and innovations.

Slim Jims manufacturer Conagra Brands Inc. Levy said previous price increases, which helped boost the jeans maker’s gross margins, would allow it to offset higher cotton prices expected next year.

However, some companies are feeling the pinch more than others.

Corona beer maker Constellation Brands said on Wednesday that benefits from the price hike and cost savings program are expected to be more than offset by higher prices for commodities including aluminium, diesel and wood.

PepsiCo has provided the company with strong pricing power by grabbing market share to keep up with demand during the pandemic, while Constellation, which is struggling to keep up with supply, has a comparatively low price to raise. There is less potential, said Markus Hansen, portfolio manager at Vontobel Quality Growth, which holds stakes in both PepsiCo and Constellation.

“PepsiCo wasn’t downplaying the idea of ​​a price increase in the mid single-digit range — 4% or 5%. That’s a very powerful thing,” said Hansen, adding that for Constellation he was looking at the lower single-digit range. .

Reporting by Uday Sampath and Praveen Paramasivam in Bengaluru; Editing by Anna Driver and Soumyadev Chakraborty

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