Actions taken by the large, diversified packaged food companies to manage high commodity prices should prevent significant margin deterioration, according to a new report issued by Fitch Ratings. Fitch expects companies to offset most of the commodity cost increases through a combination of higher net product pricing, cost-cutting and favorable mix changes over the near to immediate term.
Rising input cost inflation is the most prominent issue packaged food companies are facing in 2011. Recently heightened commodity input costs are driving cost inflation for packaged food companies to mid-to-high single-digit levels and beyond that level in certain categories. Packaged food companies are incurring short-term pain in the form of a margin squeeze, as costs have jumped faster than the companies can implement higher pricing.
"If commodity inflation cannot be entirely offset in the near term, flat to slightly lower margins alone are not anticipated to affect ratings," says Judi Rossetti, senior director, Fitch Ratings. "However, if lower profitability is sustained and accompanied by a more aggressive financial strategy that leads to higher leverage, rating downgrades are likely."
Packaged food companies are trying to take a balanced approach to implementing higher prices for their products, mindful that the economic recovery remains hindered by weak labor and housing markets. Steep food price increases could alienate consumers, particularly as higher gas prices have put further pressure on consumer spending.
In its report published, Fitch provides an analysis of key commodity inflation drivers, a comparison of inflation exposure for each of the major packaged food companies and a review of the inflation spike in 2008. The report is titled U.S. Packaged Food: Commodity Cost Conundrum Prompts Risky Pricing Decisions and is available at www.fitchratings.com.
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