Tariffs Spur Measured Response by Brands and Retailers  

By Dale Buss

CPG brands are being roiled by new U.S. tariffs on steel and aluminum and by retaliatory levies on their products by the European Union, Canada, China and other importers. But fallout from the tariff war alone hasn’t become significant enough to prompt American grocery retailers to raise prices. They are sifting through factors including other inflationary pressures, offsetting deflationary trends, and their own expectations about the Trump administration’s tariff strategy.

Some reactions to President Trump’s tariffs on imported metals – such as Coca-Cola’s July announcement that it would boost prices in the United States because of higher prices for the raw materials for its cans – prompted concerns that tariff-related price increases would surge onto the shelves of America’s supermarkets and supercenters.

But so far, retailers have mostly been riding out the tariffs’ impact and, meanwhile, reacting more immediately to other developments that have been strongly affecting pricing, such as the spread of grocery sales on e-commerce platforms. Retailers are pretty much in wait-and-see mode in terms of their own pricing actions related to tariffs’ impact.

“We’re not seeing anything yet, though we’re hearing some discussion about concerns,” David Peacock, president and chief executive officer of St. Louis-based Schnuck Markets, with 104 stores in a handful of Midwestern states, told CPGmatters. “It’s a little like what happens with fuel-price spikes. We’ll adjust to them in the short term, but rarely do you see them play through systematically on the shelf.”

Keith Daniels, a partner at Carl Marks Advisors, agreed, saying, “It’s a bit early to tell if retailers will absorb price increases” related to tariffs “or try to pass them on to the consumer. Given the margin pressures many grocers are experiencing, they are likely to try to pass the increases on to the consumer as much as possible,” said the grocery-retailing specialist at the New York City-based investment-banking firm.

And Carlos Castelan, co-founder of the Minneapolis-based retail- and consumer-goods consulting firm, Navio Group, observed that “for the moment, tariffs do not seem to have a high impact on price increases.”

Meanwhile, there are other indications of less than alarm at the tariffs. The Food Marketing Institute, for example, hasn’t even formulated a position yet on the impact of tariffs on the food-retailing industry and the 38,000 products available in the average grocery store. And Kroger’s latest big news on pricing is that its Milwaukee-based Roundy’s division is actually cutting prices “on thousands of items” at its retail stores in Wisconsin, complete with bold price-cutting signage in the aisles as Kroger tries to expand on its investment in a market where it already is the share leader.

There’s been enormous hand-wringing in the news media about what the impact might be on U.S. food prices from tariffs on metals that are packaging staples for huge CPG categories. And indeed, Daniels noted, “CPG brands that are dependent on steel and aluminum for packaging are on the tip of the spear of the pricing pressure from tariffs. Products such as soda, soup, canned vegetables and fruits, canned meats and fish, and beer are likely feeling the pinch already as prices for these commodities have increased double digits since the beginning of the year.”

Coke said its increases would be “disruptive” but vary significantly in terms of whether and how they showed up on grocery shelves. But in doing so, Coca-Cola conceded that the most important point in terms of expectations about tariff-related consumer-price increases: It’s up to retailers to decide pricing, ultimately. And at this point, Coke’s higher wholesale prices are one of a multiplicity of factors these retailer customers must consider, even in terms of pricing just for carbonated soft drinks.

Food-price inflation this year through July has been basically in line with other slowly rising consumer prices, government data show. Yet grocers have been raising prices here and there due to a variety of other factors. “Amidst the backdrop of a strong economy and years of low inflation, grocers are continuing to pass along rising product costs to customers,” Castelan said.

Higher energy costs because of oil-price increases have been a contributor, for example, as have been supply shortages of many commodities and ingredients related to fires in California and drought conditions elsewhere.

The extreme labor crunch due to fast-rising U.S. employment levels has hit supermarkets just as hard as other businesses. Yet the grocery-retailing industry typically has much tighter operating margins than other verticals, making increases in wages and benefits more difficult for food retailers to swallow.

Another factor that gives retailers cover for spotty price increases, Daniels said, is that “other items that are experiencing deflation from the tariffs such as beef, pork and dairy, will offset the increases in the customer’s mind.” Dislocations for U.S. farmers and ranchers have begun to come into play as they adjust their crops, herds and flocks to retaliatory tariffs by American trading partners that have hit exports of many food products – ranging from cranberries to orange juice, bourbon to peanut butter – hard, creating at least temporary domestic gluts of many agricultural commodities.

A variety of other offsetting deflationary factors also are strongly in play.

There is one key reason that grocers may resist CPG brands’ attempts to boost prices. After several years beginning with the Great Recession and stretching into a current adaptation to millennial-consumer thriftiness, many food and beverage companies lately have been enjoying stronger sales and higher profit margins. Retailers know that.

“They’re more profitable than they used to be and so they can absorb some of the inflationary pressures," Schnuck’s Peacock said. “We’d like to push back, unless we see broader inflation to indicate the market could bear [retail price increases]. Especially on packaged products that are purchased habitually, you could create a negative effect if you let prices creep up or down just in the short term.”

The long-term move by American consumers away from highly processed, center-store goods and toward fresh and unadulterated foods also has tended to undermine the efforts by many traditional CPG giants to boost their wholesale prices.

“Many CPGs have volume challenges,” Peacock noted. Daniels said that “strong power brands with high demand such as Coca-Cola will likely have more success in taking price [increases] due to the tariffs.” Yet, he observed, it could be difficult for retailers to raise prices even for Coca-Cola because the iconic brand “drives customer visits based on price, meaning it’ll be harder to pass along price increases.”

In any event, retailers’ reactions to wholesale-price increases also have much to do with what chain is doing the reacting. “Smaller store and regional grocers,” Daniels said, “do not have the scale” to resist some prices increases. “Large retailers, such as Walmart, have more leverage and will probably be more resistant to pricing.”

Operating robustly in the background is another huge factor: Bricks-and-mortar grocery retailers can’t afford to increase prices for the most part because of accelerating competition by Amazon and other e-commerce purveyors.

“Prices have been artificially low because of the Amazon effect,” said Ken Harris, managing director of Cadent Consulting, a leading CPG advisory firm. “You can’t raise retail prices if consumers can find it on Amazon at less than half the price.”

The extreme price war set off by e-commerce is testing CPG brands and all retailers as never before, and to a much greater extent at this point than tariffs.

“There are very few industries as disrupted as food is right now,” Peacock opined. “But every player within retail has to lean in to where we differentiate. As a regional grocer, we can’t try to copy Walmart or Aldi. We have to bring our own proposition to market and recognize how consumers find it attractive.”

One more thing about tariffs: Peacock and other grocery executives suspect the metals tariffs and saber-rattling about other potential levies remain largely a short-term negotiating ploy by President Trump to get America’s major trading partners to agree to some restacking of the deck. So they don’t want to over-react to current circumstances.

“For lack of a better term,” Peacock said, “we’ve got to show our teeth. That doesn’t suggest to me that there’s some sort of long-term desire on the part of the Trump administration to leverage tariffs as a new revenue source.”

                                                                      Mid-August 2018
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