How food entrepreneurs can strengthen responses to rising input costs

Food input costs are increasing in early 2022, which makes knowing the root causes, and how big businesses are reacting, helpful to food entrepreneurs to plan a successful response.

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Rising input costs are a challenge to food businesses. Maintaining the same price will hurt profit margins. However, increasing prices can make a product less competitive, resulting in potentially lower sales. This article summarizes projected price increases in grocery, why those costs are increasing and next steps food entrepreneurs can pursue.

Will grocery prices increase in 2022?

No one can predict with perfect certainty how prices will change in 2022. Experts, however, agree that grocery prices will increase this year. There is disagreement, though, on the magnitude of price increases. According to Bloomberg, the inflation rate was 7% in 2021, with expectations of inflation to stay near this high rate before reducing to 3% in the second half of 2022.

Grocery is a potentially different picture, according to the Food Institute’s outlook on inflation for 2022. RBC Capital Markets, for example, projects food inflation of 6-7%, with 7-8% for drink inflation, while KPMG predicts more significant price increases in their Consumer Pulse Survey Grocery Forecast 2022 report. In the survey of 1,000 U.S. consumers, respondents indicated they expect to pay 14% more on groceries in 2022 than in 2021. These respondents expected to pay 8% more at restaurants. The Wall Street Journal indicates, and lists, differs in their projected inflation rates, based on grocery category. All these increases are significant, however, compared to recent baseline inflation numbers near 2%.

Why are costs increasing?

Costs are increasing due to both supply and demand. According to the Food Institute, many consumers are still eating more from home, which increases demand for grocery products. At the same time, grocers face supply chain challenges in receiving enough product to sell. A new index from the Federal Reserve Bank of New York measures and projects how the supply chain is likely to change. Supply chain pressures are high, but expected to moderate over 2022.

Companies also face potentially higher operating costs related to shipping, labor and ingredients. The labor force is tighter as workers leave the workforce permanently or when sick with COVID-19. Some companies cite higher labor costs as a reason for raising prices. This is true in certain industries, like meat processing, where the Food Institute notes, for example, that Tyson Foods’s full labor cost will increase to $24 an hour. However, according to Bloomberg, real wages paid to workers overall is down 2.4% from December 2020 to December 2021.

How can food entrepreneurs react?

One guide is to examine the actions of large food processing companies, as summarized by the Food Institute in their 2022 outlook on inflation. General Mills, for example, will raise prices 20% for certain brands. Mondelez International expects cost increases of 6% to cue price increases of 7% in 2022. Increasing prices is certainly an option for small food businesses; however, this route is highly contingent on the competitive pressures within a specific grocery category. How a business manages a price increase matters too, as noted by Forbes Business Council member, Ryan Weissmueller, in the article, “How Small Businesses Can Win During Supply Chain Disruption: Pricing.” Delayed or staggered price changes may make sense depending on the customer and competitors.

Price increases may cause some consumers to trade down and purchase cheaper versions, like private label. A food business can instead decide to decrease the packaging size to cut costs, while maintaining the price. Businesses can also decrease the fill or mix of certain, more expensive ingredients within a product. Any changes made to net weight or ingredient mix, however, must be reflected on the product label.  

Michigan State University Extension Product Center

A product’s price has large impacts on consumer expectations and overall sales. Consider working with Michigan State University (MSU) Extension’s Product Center to examine costs, pricing structure and value communication for your food product. The MSU Product Center is an organization that brings together on-campus expertise in the sectors of food, agriculture, and natural resources to help entrepreneurs define and launch innovative products. Field-based innovation counselors advise entrepreneurs on business planning, regulatory requirements, and product development needs. To access business development assistance, select the request counseling tab on the MSU Product Center website or call 517-432-4608.

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