Archstone Consulting, an independent strategy and operations management consulting firm, announced the results of a recent study revealing that major US food companies have successfully been able to limit the impact to margins of soaring commodity and energy input costs. Cost increases have partially been passed on to consumers through higher prices and some have been off-set elsewhere in the business.

“The dual challenge of managing cost inflation and soft consumer demand were the critical business issues for US food companies coming into 2008,” says Dave Sievers, Consumer Products and Retail Practice Leader at Archstone Consulting. “We had every expectation that this would be a very difficult year. After a rough period in 2007, the major branded food companies have been able to reverse declining margins. Companies like Kraft, Kellogg and Hershey have seen significant improvement in gross margins during the second quarter. If those trends continue and commodities stabilize or even begin to come down, we can start to see the light at the end of the tunnel for those companies,” says Sievers.

Private label food companies are actually benefiting from the current economic environment. “Companies like Ralcorp have had the luxury of increasing prices and increasing unit sales volume as consumers migrate to less expensive private label products,” explains Sievers.

Impact on the Consumer

“The consumer has had to absorb substantial price increases over the past year. Across all retail food categories the increase has been just over 5% within the past 12 months and 10% or more in many hard hit categories like dairy,” says Patti Muldowney, Archstone Consulting Director of the study. “What is surprising, however, is that the consumer is by no means absorbing all of the impact of surging commodity costs. A significant amount of commodity inflation is being off-set by efficiencies elsewhere in the supply chain and company gross margins are down since this crisis began. We are seeing the pain of commodity costs almost equally shared across consumers, investors and companies’ ability to operate more efficiently,” says Muldowney.

Going Forward

Based on the stated intent of most large, branded food companies to expand investment in advertising and marketing in order to maintain brand advantage and pricing capabilities, we anticipate focus shifting toward operating margin management, and potentially, additional price increases.