Tuesday, October 15, 2013
Food Makers Raise Prices, Keep Wary Eye On Customers
TOKYO (Nikkei)--Food prices are rising due to the weaker yen and higher prices for raw materials, but the specter of deflation still looms at the retail level and a consumption tax hike is coming.
This has put manufacturers and retailers on the horns of a dilemma: To maintain profits they must pass on higher prices to consumers, but this risks dampening consumer demand and revenue.
Prices for many food items are rising for the first time since 2007-2008, when crude oil and grain prices soared. Crude prices reached an all-time high of 147 dollars a barrel in 2008, fueled by growing demand from China, India and other emerging markets as well as an inflow of speculative capital. Food makers felt squeezed by surging raw-material and packing costs, so they raised prices for many products, including soy sauce, miso paste, beer and instant noodles.
Soft Yen, Hard Place
This time around, the price rises are driven by tight supplies of grain and other farm products following a drought in the U.S. last year and the sudden decline in the yen. Although international commodity prices are down from their recent peaks, the yen plunged to around 100 yen to the dollar following the change in government in Japan last December. That swelled the procurement costs of food makers, which depend on imports for raw materials.
Compared with five years ago, food processors are raising prices on fewer items and the increases are not as sharp. Consumers appear more price-sensitive recently, making companies think twice about jacking up prices.
The outlook for consumption is also becoming more uncertain ahead the sales tax increase in April 2014. "We will decide how to deal with the situation after weighing changing consumer needs," said Hiroshi Urakami, president of House Foods Group Inc. (2810), regarding plans to pass on higher costs to consumers.
Kewpie Corp. (2809) raised the shipment price of mayonnaise for consumer and commercial use by 2-9%, starting with shipments made July 1, in response to higher prices for packing materials and cooking oil, which accounts for 70% of input costs. "We could no longer absorb the increased cost," said a Kewpie official, because leading cooking oil companies such as Nisshin OilliO Group Ltd. (2602) and J-Oil Mills Inc. (2613) had raised prices. Ajinomoto Co. (2802) and Kenko Mayonnaise Co. (2915) followed suit.
Nisshin Seifun Group Inc. (2002), Nippon Flour Mills Co. (2001) and Showa Sangyo Co. (2004) have increased wheat prices twice this year after the government raised the price of imported wheat it sells to flour millers.
Meiji Holdings Co.'s (2269) subsidiary Meiji Co. and other leading dairy companies raised the price of milk by 1% to around 4%, starting with Oct. 1 shipments. Major wine bottlers including Mercian Corp. raised prices by 2-9% in September.
Some companies are trying to hold down costs by jointly procuring raw materials, expanding their range of suppliers, and trimming the weight of containers to avoid passing on higher prices to consumers. Kagome Co. (2811) will seek new supplies of tomatoes in Australia and Portugal. Key Coffee Inc. (2594) will seek new sources for coffee beans, such as Ethiopia.
(The Nikkei Business Daily, Oct. 13 edition)