Measuring impact of price changes on food

by Morton Sosland
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Now that half of this year has passed in which food ingredient costs have displayed a quite different path from the advances of the past year, 2012 is shaping up to be central to the industry learning whether stable or lower prices will have a positive effect on unit sales. Even posing this possibility strikes an unusual note for an industry like food manufacturing that hardly ever has regarded product price stability or declines as important to sales volume. All of that changed in 2011 when upturns in product prices were credited with causing significant downward pressure on unit sales of major food categories. Now, the question at hand is whether a reversal of prices or at least stability may revive unit sales of the same branded foods that suffered as retail prices posted the sharpest gains in recent history.

Unit sales declining as food prices rose, as happened in 2011, was a new experience for most of the food industry and especially for those parts of the industry that had considered product demand so certain that price advances should have little effect. Instead, nearly unprecedented price upturns proved negative for almost all food categories. As a reminder, the Consumer Price Index for all food, compiled by the Bureau of Labor Statistics, advanced 3.7% in 2011 and food eaten at home scored a gain of 4.8%. The two indexes had risen only 0.3% and 0.8%, respectively, in 2010, which could be ranked as an “ordinary” year. So far in 2012, the all food index has gained 2.2% and food eaten at home is up only 2.3%.

One of the most instructive changes in food prices last year, which provides a guidepost for 2012, is the showing of food eaten away from home. The index of food eaten away from home rose a relatively modest 2.9% in 2011, which was perceived as an effort by food service operators to avoid advances matching what occurred in the cost of all food. They feared sharp gains would have a seriously negative effect on their business. Decision makers in this away-from-home market obviously perceived price upturns would exacerbate the negatives flowing from the slowly gaining economy. While food manufacturers might have thought they could raise prices without seriously impacting unit sales, food service operators of almost every stripe knew that was not the case. This explains their high degree of caution. For food manufacturers, modest gains in dollar sales masked what was happening to the business as measured by units.

Although food input costs have weakened or held steady for the most part this year, overall levels are still well above what might be described as normal. Even with the difficulties prompted by price advances last year, it would be totally wrong to see the present environment as an opportunity for lowering prices to any degree. In addition to the extreme volatility underlying all basic food inputs, hardly anything in the current scene justifies a significant reversal of price advances. That is especially the case without a definite and proven case showing such actions as certainly resulting in an increase of unit sales.

It is enticing to declare that the food industry has entered a new environment in which the dimensions of upward price adjustments need to be judged against their likely effect on product volume. Still awaiting answers is the degree, if any, to which price stability or even reductions in the wake of input cost declines have a counter effect. Having newly experienced the power of price advances to impact business in such a direct manner, evidence is still awaited regarding the opposite. A widespread guess is that price stability or declines will do little to stir recovery of lost unit sales. It is likely this turnabout will occur only in response to innovations that produce new product values. After all, that’s where the industry has prospered for a long time.
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