The cost of food is down, but grocery bills are still high. Here’s why

New York (CNN) Why don’t prices go down at the grocery store? When food producers started raising prices several years agoblamed their own costs, incl High price of components. But ingredient prices have actually been declining for months, and people are still paying more for food.

In part, this is because food producers have other expenses that are still more expensive, such as labor and transportation, than they were a few years ago.

But critics and industry experts say the cost increases have given food makers cover to raise prices above what those increases called for, boosting profits and correcting what they considered too low prices in previous years.

Now that they see that people will pay more, they are in no rush to give up profits by charging less.

“When costs change, particularly when costs change in a very public way,” it is not unusual for companies to take advantage of this moment to raise prices.And said Jean-Pierre Duby, professor of marketing at the University of Chicago Booth School of Business. “Companies see these opportunities as spin-offs, and they don’t want to miss them.”

Between January 2022 and January 2023, Grocery prices increased by 11.3%. Many food companies anticipate that they may slow or pause price increases — but not cut them.

Agricultural commodity prices fell after peaking in May, According to the US Department of Agriculture. And the downward trajectory continues: Prices of the commodities wheat, coffee and cocoa all fell in the last week in February, according to a recent report by Rabobank. But the ingredients usually make up a small portion of the total costs of the food. Manufacturers often pay for other things like transportation, packaging, and wages.

“There have been pressures on the supply chain, and there have been increases in the cost of goods. But [companies] “I think they’ve had price increases that exceed that,” said Mark Lang, an associate professor of marketing at the University of Tampa who specializes in food marketing.

Conagra (CAG) And Hershey (HSY) It posted higher profits in its most recent quarters, year over year. PepsiCo (PEP) And coca cola (KO) It posted profit growth in the third quarter, before seeing a decline in profits later in the year.

Companies are keeping prices high, or continuing to raise them, at a time when many Americans are already struggling to pay for food, especially since Food stamp benefits expire in the age of a pandemic. “This kind of activity, in a big picture way, lowers the country’s standard of living,” said Lang.

Occasional opportunities

economic inflation It can give companies a reason or excuse to raise prices that are acceptable to shoppers.

A few years ago, food makers “began increasing their prices very rapidly, and that, in addition to the headlines – which… [meant] “Consumers weren’t going to complain—everyone was raising their prices,” said Dube. “It took a while for the consumer to understand that prices had gone up.”

Some shoppers may not have noticed a slight price hike for individual items, or they were paying the same amount for a lesser product, known as deflationeven though they may have realized their dollars wouldn’t go very far at the supermarket.

But even if they register the changes, people can’t stop buying food. He has cut back on many restaurant visits or It was traded down to less expensive chains and sites. others They shop at budget groceries, like Aldi. Some would splurge on getting sweets at the store to replace expensive luxuries.

So people continue to buy food at the grocery store, despite the higher prices—giving producers a chance to convince retailers that those higher prices won’t drive customers away.

“The price was too low”

Retailers want food makers to keep prices down. This works well for them and consumers, but not for manufacturers.

When asked during a conference in February how ConAgra was able to raise prices without losing sales by volume, CEO Sean Connolly said, “Prices were pretty low in a pre-pandemic frozen state,” adding, “What we’ve been able to clear up for the retailer is that consumers would welcome the $4.50 unit,” because at that price, a frozen meal is still a good value.

Conagra, which makes pizza and frozen bowls for Marie Callender’s, Birds Eye and Healthy Choice, said its higher price points have allowed it to improve its ingredients. For the quarter ended Nov. 27, it reported net income of $382.2 billion — up about 39% year-over-year.

During its fourth-quarter earnings call, Coca-Cola was asked about reports of retailers’ opposition to pricing. “We got the price right with consumers,” said CEO James Quincy. Quincy said that if he can prove that people will pay more for Coca-Cola, he can convince retailers that higher prices will also be good for them. Coca-Cola said it plans to continue raising prices globally, noting that input costs remain higher than normal.

Tom Bailey, chief consumer food analyst at Rabobank, predicts that prices will eventually come down. Some items, like lettuce and tomatoes, are already becoming less expensive at the grocery store, according to government data.

If companies adjust their pricing, Bailey said, they will have to do so carefully.

“If you start lowering prices, it can undermine the value proposition that brands and manufacturers have built over the years with consumers,” Bailey said. Low prices can, for example, make people think the quality of the food has decreased – or make them think they were paying too much in the first place.