Concerns Abound Over Food Costs

In today’s struggling economy, more than half (58%) of U.S. consumers are “very concerned” about rising food prices, The Nielsen Co. found in a new survey on consumer purchasing trends.

As consumer packaged goods (CPG) manufacturers and retailers employ options to manage abnormally high cost increases due to raw material and other expenditures, consumers voiced their preferences on how CPG manufacturers and retailers should handle rising costs. The Nielsen survey found:

•Nearly half (47%) of consumers surveyed prefer CPG manufacturers offer large, economy sizes with lower price points per serving.
•Only 17% of consumers prefer CPG manufacturers introduce new, smaller pack sizes at lower prices.
•Nine percent of consumers suggest CPG manufacturers downsize or modestly reduce the packaging size of products, keeping the price of the product the same.
•Other options include raising the prices of existing items proportionally (8%); offer fewer sales (8%); offer the same number of sales, but at less of a savings (7%); and produce slightly lower-quality products, but keep the price the same (4%).

“Without question, this is an extremely tough time for today’s consumer,” said Todd Hale, senior vice president of consumer and shopper insights for Nielsen. “CPG manufacturers and retailers have few options to manage rising commodity costs beyond absorbing increased costs, passing on increases to consumers by raising prices or cover increased costs by downsizing offerings.”

Downsizing, in particular, is not a new option. “We’ve seen downsizing over the last few years in a number of categories, including ice cream, cereal, candy bars, salty snacks and paper products,” Hale said.

Who’s to Blame?

Grocery prices started rising last year when corn, wheat and other commodities shot to record highs. The grocery industry
blamed the ethanol industry’s use of food for fuel. Now ethanol supporters are firing back, according to a CBS News study.

“Corn is back down 50% lower than it was just five months ago,” said Sen. Charles Grassley (R-Iowa), “so why hasn’t the price of food come down?”

Even though corn is now selling for less than half of its June price, the Thanksgiving turkey that feeds on that corn costs 8% more per pound. The wheat baked into the dinner rolls is down 60%, but the rolls are up 16%. And the soybeans in all those holiday pie crusts? Down 47% since summer, but cost is 9% more, the CBS study found.

Experts say it’s because grocery pricing is about more than just commodities.

“Raw commodity costs represent about 20% of the total food bill at the grocery store. The other 80% represents all the other costs that are involved getting food from the farm to the grocery store,” said Scott Irwin, an agriculture economist at the University of Illinois.

According to the USDA, those “other costs” include:
• 48% labor
• 10% packaging
• 10% transportation
• 6% profits
• 26% other (advertising, promotion, taxes, interest and depreciation)

Supermarket chains have been trying to preserve customer visits in an effort to stop losing fill-in sales to convenience stores. Wegman’s, a regional Northeast and Mid-Atlantic grocery chain, is eating into its own profits by cutting prices 5% throughout its stores.

The USDA, meanwhile, is predicting another 5% food increase for next year, the CBS study reported.

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