A ‘perfect storm’ is making it much more costly to produce food, but consumers might not feel it

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Some of the world’s largest food manufacturers are warning that soaring ingredient costs will force them to raise their product prices, but the head of a top Canadian supermarket chain on Wednesday said those increases won’t translate into higher grocery bills.

Consumer product multinationals, including Coca-Cola Co., Procter & Gamble Co. and J.M. Smucker Co., have started signalling that price hikes are on the way after a series of calamities — from the Texas winter storm to the Suez Canal blockage — overwhelmed global supply chains that were already reeling from the pandemic.

Shipping containers are hard to come by, ports are clogged and the scarcity of commodities have only made it more difficult and costly to produce food. For example, a shortage of the resin needed to make plastic bottles has complicated the task of packaging products.

The price of key ingredients needed by Canadian manufacturers have spiked by as much as 40 per cent, according to the lobby group Food, Health and Consumer Products of Canada (FHCP). And a labour dispute at the Port of Montreal has made it harder to obtain those ingredients.

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“All of these things are starting to create a perfect storm for inflation as we go forward,” said Michael Graydon, FHCP’s chief executive. “You can’t continue to absorb these types of significant increases in cost. At some point, you just have to say, ‘I give.’”

This week, Procter & Gamble, the giant of household goods that owns the Tide, Bounty paper towels and Charmin toilet paper brands among others, announced it will raise prices in September to compensate for the higher costs of shipping and raw materials, such as resin and pulp. One P&G executive told the Wall Street Journal that the recent spike in commodity prices was one of the biggest he’s seen in more than three decades.

The coming wave of price increases is also liable to further exacerbate tensions in the Canadian grocery business. Through the pandemic, food retailers and producers have been locked in an ugly battle over the fees and fines supermarket chains charge their suppliers — an issue that’s currently under government review.

But Metro Inc., Canada’s third-largest grocery chain, during an earnings call on Wednesday suggested that the manufacturers’ problems won’t impact consumers.

Metro chief executive Eric La Flèche said the situation is “volatile” and “uncertain,” but predicted that food inflation in Canada will hold steady around 1.5 to 2.5 per cent in 2021, similar to last year.

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There’s a lot of price politics right now

Sylvain Charlebois

“We don’t expect the inflation picture overall to change that much,” he said. “The 1.5- to 2.5-per-cent number is something that we think is realistic. But again, no crystal ball — and it is volatile, and it is uncertain.”

Others, however, are expecting food inflation to get much worse in 2021. Sylvain Charlebois, director of the Agri-Food Analytics Lab at Dalhousie University in Halifax, is projecting hikes of three to five per cent in 2021, well above the 2.7 per cent figure posted in 2020.

“The cost to produce food is increasing, there’s no doubt in my mind,” he said. “How that is going to translate into grocery stores, nobody knows for sure. There’s a lot of price politics right now.”

Metro and its competitors have made dramatic sales gains over the past year, as pandemic restrictions forced more people to shop for food and eat at home. But grocers are now facing the impossible task of topping historic sales figures made around this time last year, when a wave of panic buying cleaned out their shelves.

But the coming decline in year-over-year sales could inadvertently lead to lower prices for consumers, since retailers will scramble to hold on to customers as restaurants reopen.

“No retailer is calling for retail inflation,” Barclays analyst Karen Short said. “There isn’t a single retailer that’s calling for it.”

She said grocers will likely start to run heavy promotions on products to try to prevent negative same-store sales growth — a key retail metric referred to in the industry as “comps” since it compares current sales to the previous year.

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“The environment is going to get more competitive because all these retailers are up against negative comps,” Short said. “As much as retailers would like to say they’re sophisticated and rational, when retailers see negative comps, they get promotional to try to drive volume. That’s just the nature of the beast.”

Metro in its earnings update projected that year-over-year sales growth will decline compared to the frenzied, early days of the pandemic.

The company has already started to see that comparison drag its growth numbers down. The final weeks of Metro’s most recent quarter, ended March 13, corresponded with the first weeks of panic buying last year, driving down its same-store sales growth to 5.5 per cent. Without those last two weeks of the quarter, Metro’s same store sales grew by 10.1 per cent, the company said.

Still, Metro reported adjusted second-quarter net earnings of $194.7 million, a 6.5 per cent increase from the same period a year ago, on sales of $4.2 billion.