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As Food Prices Rise, Private Labels May Have an Advantage

Shoppers who want to control their grocery bills or even save money are probably familiar with this well-known tip: Go to the store with a shopping list and stick to it. Don’t get carried away with impulse buying.

But discipline alone may not be enough to protect shoppers from sticker shock at checkout, especially if they like branded products.

According to the monthly consumer price index from the Bureau of Labor Statistics, food prices have risen 7.4% over the past year. The inflation rate is at its highest level in 40 years.

The reasons are now well known. The lingering pandemic economy, with its supply chain delays and labor shortages, continues to drive up the costs of transportation, agricultural produce, packaging, and just about everything else.

As large food and beverage companies and grocery stores grapple with rising costs, many companies have begun to pass them on to consumers. Some of the most notable increases came from branded products from major food manufacturers like Kraft Heinz and Coca-Cola.

Meanwhile, private label or store prices have not increased as much. They include lines like Good & Gather from Target, Great Value from Walmart, and 365 from Whole Foods Market.

“Store brands increase their prices more slowly than national brands because they have a contract with a supplier for a year or two years and it’s a fixed price that’s locked in,” said Phil Lempert, a food marketing expert. dubbed the Supermarket Guru. “The manufacturer, not the store, will absorb it in the short term.”

Private labels are usually manufactured by third parties, which protects them from rapidly rising costs. National brands, on the other hand, often oversee their own manufacturing and distribution and absorb price increases throughout the supply chain.

“Companies have absorbed a certain amount of money, and they cannot continue to do so. They have to pass it on,” Lempert said.

And they didn’t hesitate to do it or brag about it. Kraft Heinz announced its quarterly results on Wednesday, beating Wall Street expectations. On a call with investors, Global Chief Financial Officer Paulo Basilio said: “While we ended 2021 having announced or fully implemented all of the pricing we had planned, we are now taking additional pricing action, if applicable.”

It’s become a familiar refrain among executives at several major food and beverage companies that also released quarterly results recently, including PepsiCo, Coca-Cola and Mondelez, which owns brands like Ritz and Oreo.

“We expect another year of material cost inflation,” said Mondelez Chief Financial Officer Luca Zaramella, who went on to highlight the benefits for Mondelez. “As such, prices will be a larger contributor than in previous years.”

While some consumers will remain loyal to certain brands, others are already adapting their consumption habits. In a survey conducted this month by Jefferies Group, 80% of respondents said they were actively looking for ways to cut costs by buying cheaper products, private labels and more sale items.

Although price differences can vary widely depending on the product, retailers have made concerted efforts to improve the quality of their private labels and ensure they are on par with branded products, while maintaining the low price, Lempert said. This is an advantage that can be useful for retailers.

At Whole Foods in Los Angeles, its 365 brand organic refried black beans are $1.39 for a 16-ounce can, while a brand-name 15.4-ounce can is $3.79. A dozen cage-free eggs from Target’s Good & Gather brand cost $2.79 in Los Angeles, compared to $5.69 for a dozen pasture-raised eggs from Vital Farms.

The Jefferies report concluded that “if prices were to rise (and they probably are), more buyers will resort to cost-cutting.

Walmart, the nation’s largest retailer, is banking on that. The company, which is seen as an indicator, reported better-than-expected results on Thursday. CEO Doug McMillon summed up his outlook for Walmart this way: “During times of inflation like this, middle-income families, lower-middle-income families, even the wealthiest families become more price-sensitive, and it’s to our advantage.”

Bragging rights are yet to be determined.

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