The cost of food is down, but grocery bills are still up. Here's why
Why aren’t prices falling at the grocery store? When food producers started raising prices a few years ago, they blamed their own costs, including higher ingredient prices. But ingredient prices have actually been on a downswing for months, and individuals are still paying more for food.
In part, it’s because food producers have other expenses that remain pricey, like labor and transportation, compared to a few years ago.
But critics and industry experts say the cost increases gave food makers cover to hike prices above what those increases called for, boosting profits and correcting what they saw as too-low prices in previous years.
And now that they’ve seen that people would pay more, they’re not rushing to give up profits by charging less.
“When costs change, especially when costs change in a very publicized way,” it’s not unusual for companies to use the moment to raise prices, said Jean-Pierre Dubé, a marketing professor at the University of Chicago Booth School of Business. “Companies view these as occasional opportunities, and they don’t want to miss out.”
Between January 2022 and January 2023, groceries got 11.3% more expensive. Many food companies are forecasting that they might slow down or pause price increases — but not lower them.
Prices for agricultural commodities are down after peaking in May, according to the USDA. And the downward trajectory continues: Wheat, coffee and cocoa commodity prices all fell in the last week in February, according to a recent Rabobank report. But ingredients typically make up a small portion of overall food costs. Manufacturers are mostly paying up for other things like transportation, packaging and wages.
“There have been supply chain pressures, and there have been commodity cost increases. But [companies] have, I think, taken price increases that exceed that,” said Mark Lang, an associate professor of marketing at the University of Tampa who specializes in food marketing. “They are, to me, absolutely profit taking.”
(CAG) and Hershey
(HSY) reported higher profits in their most recent quarters, year over year. PepsiCo
(PEP) and Coca-Cola
(KO) reported profit growth in the third quarter, before seeing declines in profit later in the year.
Companies are maintaining elevated prices, or continuing to increase them, at a time when many Americans are already struggling to pay for food, especially as pandemic-era food stamp benefits expire. “This kind of activity, in a big picture way, reduces the standard of living for the country,” said Lang.
Inflation can give companies a reason, or an excuse, to raise prices that shoppers will accept.
A few years ago, food makers “started increasing their prices very rapidly, because in addition to the headline news — which [meant] consumers weren’t going to complain — everybody was raising their prices,” said Dubé. “And it took a while for the consumer to understand that prices have gone up.”
Some shoppers might not have noticed slightly higher prices for individual items, or that they were paying the same amount for less product, known as shrinkflation, though they might have realized that their dollars weren’t going as far in the supermarket.
But even if they did clock the changes, people can’t just stop buying food. Many have cut back on restaurant visits or traded down to less expensive chains and locations. Others are shopping at budget grocers, like Aldi. Some may be splurging on treats at the store to replace more expensive luxuries.
So people keep buying food at the grocery store, despite higher prices — giving producers an opportunity to convince retailers that those higher prices won’t drive customers away.
Retailers want food makers to keep prices low. That works out well for them, and for 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 “pricing was just too low in frozen pre-pandemic,” adding, “what we’ve been able to illustrate for the retailer is that consumers will welcome a $4.50 unit,” because at that price, a frozen meal is still a good value.
Conagra, which makes Marie Callender’s, Birds Eye, and Healthy Choice frozen pizzas and bowls, said that the higher price points have allowed it to improve its ingredients. In the quarter ending on November 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 retailer pushback on pricing. “We’ve earned the right to price with the consumers,” said CEO James Quincey. If it can demonstrate that people will pay more for Coke, it can convince retailers that higher prices will be good for them, too, Quincey said. Coca-Cola said it plans continue to raise prices globally, noting that input costs are still higher than usual.
Prices will eventually come down, predicts Tom Bailey, a senior consumer foods analyst at Rabobank. Some items, like lettuce and tomatoes, have already gotten less expensive in the grocery store, according to government data.
If and when companies do moderate their pricing, Bailey said, they’ll have to do it carefully.
“If you start dropping prices, it can undermine the value proposition that brands and manufacturers have built up over the years with their consumers,” said Bailey. Lower prices could, for example, make people think food quality has gone down — or make them think they were paying too much in the first place.