Pie in sky

Food inflation: Fickle weather, decreasing farmland and more mouths are pushing up prices of wheat and other important ingredients and soft commodities. Companies feeding the hungry masses are running out of places to slash costs and increasingly being forced to pass the inflation on to customers to avoid smaller profits. Big brands and proactive market leaders, like McDonald’s and Pepsi, stand to survive the storm best.

Some early evidence seems to favour the brave. J M Smucker has been leading the way hiking the price of Folgers coffee. A jar that sold for $4 a year ago now costs $5.20, a 30 per cent increase. Rival Kraft typically has taken longer to raise prices in this category, but Smucker’s shares have performed better despite — or maybe because of — the aggressive moves.

Pepsi also shocked markets earlier this year when it jacked up forecasts for commodity inflation to roughly double what rivals like Coca-Cola were expecting. But competitors have slowly come around, and in the meantime Pepsi shares have outperformed theirs.

The cost adversity also puts market leaders in position to throw their weight around. McDonald’s, for example, plans to invest $1 billion over the next few years to remodel some 5,000 restaurants. A nicer atmosphere might help ease the pain of a pricier Big Mac. In the past, such redesigns have increased sales of established stores by 6-7 per cent. Smaller rivals may not have such capital to invest to mask their costlier meals.

History also favours the titans. During the last big global food inflation, in 2007-08, General Mills hiked prices and still gained impressive market share. With brands like Cheerios and Lucky Charms, the company surged from 16 per cent of US cereal sales to 26 per cent in a year, according to research firm IBISWorld.

With the economy only wheezing back to life and jobs still hard to come by, consumers may not have as much of an appetite for higher prices as they had in previous downturns. But the companies big enough and bold enough to tackle the issue head on seem nevertheless to have an edge in tough times.