While U.S. core and headline inflation came in below expectations, according to the latest Consumer Price Index release, it will be well into next year before consumers see this inflation slowdown in their grocery bills and restaurant tickets. Retailers and distributors are continuing to feel the pinch of rising costs throughout the supply chain.
The CPI for food at home and food away from home rose 3.0% and 4.7% year over year in August. While these rates are well above the long term averages, retailers continue to bear the brunt of rising costs of input, logistics and labor costs. The impact showed up in the August Producer Price Index for final demand foods, which ballooned to 12.7% over the prior year.
Some relief for input costs may be on the way as producers and growers respond to surging prices by increasing production of high demand crops like corn. But certain systemic drivers will be affecting margins for the foreseeable future.
While initial jobless claims fell to 310,000 for the week ending Sept. 4, food manufacturers and distributors continue to struggle with not only bringing employees back to work but keeping them working with the rise of the more contagious delta variant.
Many middle market companies continue to raise wages and offer other bonuses and incentives just to keep their lines operating. Logistics challenges remain with capacity constraints and increased demand further exacerbated by a lack of refrigerated or food safe warehouses in areas close to high density populations.
Finally, continued volatility from energy prices affecting packaging costs and weather events affecting commodities have the food and beverage industry feeling the margin squeeze.
The takeaway
Without the advantage of scale of larger counterparts, middle market food distributors and retailers should prepare for long-term margin pressure. This will include building longer resilient systems that emphasize demand planning and evaluating physical footprint to bring products closer to consumers. To stay competitive, middle market companies in the food and beverage ecosystem will also need to understand and capitalize on consumer preferences to solidify market share and consumer spend.
