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End Flap: How Food Processors Can Spend Their Post-Pandemic Profits

Aug. 24, 2022
Senior Editor Pan Demetrakakes offers some unsolicited advice on how a prospering industry should spend its profits.

Over the past couple of years, as America got vaccinated, one of the big questions was how the food industry would do as it came out of the pandemic. Supply chains had blown up, workforces were decimated, all kinds of relationships strained or sundered. What effect would all that have on the bottom line?

Well, judging by the latest numbers, it couldn’t have hurt much.

Member after member of the Big Food Club put up stellar results in their latest fiscal years. As we delineated in last month’s issue, 56 of the Food Processing Top 100© saw sales increases, and 32 saw increases in net income.

The good news is continuing, with Kraft Heinz, General Mills, Kellogg and others racking up great numbers in the most recent quarters. And it’s not just financial results: Capital spending is merrily increasing too. Of the public companies in our Top 100© list, their capital spending budgets for 2022 total 14% more than their capital expenditures last year.

In many cases, success came as a result of successfully raising product prices and having those raises stick. Some companies were able to post big profit increases even as their unit sales volume declined. General Mills, for instance, saw an 85% increase in profit in its fourth fiscal quarter (ending May 29), even though unit sales were down except for pet food a relatively new (and stunningly profitable) business for GM.

Now, as any big lottery winner can tell you, once you come into a large sum of money, there are suddenly a lot of people around you telling you how to spend it. And I’m no different. Here is my entirely unsolicited advice to food & beverage companies that find themselves with good financials:

Don’t get greedy

Inflation is top of mind for most American consumers, if not most around the world. As prices spiral, so does a narrative about “greedflation” – companies raising prices just because they can. Food is especially sensitive in this regard because it’s something that most people buy at least once a week.

It's tough to raise your product prices just enough – to find the sweet spot between covering your own added expenses and making your products uncompetitive. And it’s tempting to pile on a little extra margin just to stay on the safe side. But doing so can foster resentment, among both consumers and trade customers. So far there haven’t been any situations reported in the U.S. similar to England, where leading grocery chains have refused to carry certain mainstream products after price increases, but it’s something to watch for.

Share the wealth

As I and other observers have said many times, the success of the food industry rests in large part on the backs of underpaid workers, all through the food chain. That’s an unsustainable situation that led to three strikes against major food companies last year.

It doesn’t seem to have hurt. All three – PepsiCo, Kellogg and Mondelēz – put up improved numbers for their latest fiscal years. But the issue isn’t going to go away. The union that struck all three companies is trying to organize another Kellogg plant. Companies with sudden wealth should start taking a hard look at their wage scales.

Reinvest

The only thing that will improve working conditions and generally alleviate the labor situation in the long term is automation. The leading meat processing companies have learned this lesson well, with plenty of long-term investment in technologies that can handle the hardest, riskiest jobs in a meat plant. Other sectors would do well to follow suit.

It can be tempting to disburse a windfall entirely among executives and shareholders. The smartest companies will resist the temptation.

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