Price hikes: can the industry cope?

As commodity prices and other economic pressures mount in the modern food and beverage marketplace, who is absorbing the costs?

-By Allan Swann - 2008

The effects of the sub-prime mortgage crisis have extended across the globe, causing foreclosures, bankruptcies and inflation and driving the costs of goods through the rood. Combined with sky high prices for petrol, and the subsequent demand for bio fuels causing food crops to be pulled up globally, never have raw materials and ingredients been in so much demand. With the excise on alcohol due to go up on July 1, brewers nationwide are looking to recover their costs at the same time.

Is this a problem that’s a miserable fact of life in the 21^st century, or a cyclical problem that consumers just have to bear for a short period? Lion Nathan’s corporate affairs director, Liz Read, believes it’s no small problem.

“Its certainly the business issue of this decade, and will continue to be in a way that it hasn’t been in the past. We are an agricultural business at the end of the day, in so far as we rely on agricultural products to make out product. Worldwide, food and beverage manufacturers are under enormous pressure in the competition for commodities, and that goes for the whole range of raw materials that go into not just our products, but any food or beverage.

“It’s a challenge that’s going to be around for the foreseeable future, but it does mean we focus on innovating, research and development we focus on working with our agricultural suppliers to find new ways of producing the materials that go into our product,” she says.

Mark Campbell, DB’s general manager of corporate affairs and human resources, agrees.

“Over the last 12-18 months the industry has seen probably the biggest price increase for some time, it is difficult to tell whether it will be long term or temporary. Malted barley is now being used for bio fuels, so we are seeing competition for raw materials from other industries that we did not have before.”

The big pinch is not only in ingredient costs, but in the flow-on effects of the world economy: Malt and barley prices have skyrocketed, transport costs related to fuel consumption are similarly high and basic items such as sugar and aluminium have gone up by a third.

“Significant increases in costs of raw materials and packaging is a critical issue for the industry worldwide. The main areas of pressure are global commodities, such as fuel, aluminium, sugar and malt that are utilised many other sectors. The cost of malt has increased by up to 50%, transport fuel has increased by 50 to 60% and sugar and aluminium by 30 to 40%,” says Campbell.

Other flow on issues include the availability of land, a problem worldwide (just look at the devastation of Brazil’s rainforests) and seen with greater regularity in New Zealand, especially in the limited regions in which items like hops can grow – in direct competition with the wine industry which is struggling to find space for vines in the crowded Marlborough region. Sourcing local ingredients, and items like glass is increasingly difficult.

“We try and source as much as we can locally, but that’s waxed and waned depending on how local seasons have gone.

Competition for land kicking is also kicking in; the whole bio fuels industry is reliant on land use going into the crops that will be used for bio fuel. That goes into a few of the bigger picture questions surrounding the balance between food and fuel needs. The other thing is prices in aluminium have really been steadily increasing of the past few years, and that’s not going to change. We try to source as much glass as we can locally, but we do import quite a lot. Most glass users in New Zealand are forced to do so, because there simply isn’t enough being produced locally – and that’s a scale issue really.

With a wicked combination of factors all working to erode margins, it’s no surprise that the cost is to be passed on to the consumer.

“We’d love to swallow the costs, but they’re just far too big to do so. We’re looking at putting through a price rise in conjunction with the excise increase in July. We’re probably looking at around 5 and a half. We’ll look at sourcing and efficiencies, but we just can’t continue to absorb those costs – and that’s been the pattern for the last two or three years really,” says Read.

“We have been absorbing the significant increase in raw material costs for the past 12 months, however we are unable to continue to absorb the full level of cost increases and are now looking at a 6 to 7% price increase on July 1 to recover some of these costs,” says Campbell.

Craft brewers are going to suffer especially, as they are usually unable to take advantage of the economies of scale: buying in bulk. Even sourcing ingredients is proving difficult. Richard Emerson, managing director of Emerson’s brewery has stated that they too will have to raise prices to compensate.

"Emerson's has always used the best quality ingredients and see no reasons to compromise the quality of our beers to try keep prices down. Trying to absorb price increases is not practical for small business where quality is paramount. As this is a niche quality market, the prices will be passed on. On the bright side, we hope the prices increases in the NZ hop industry may encourage existing or new hop growers to plant our favourite aroma hop varieties,” he said.

Given that these price rises will be passed on to the consumer, members of the hospitality industry will also have to walk on eggshells. Bruce Robertson, chief executive of HANZ, believes that the industry “needs to be actively reviewing their entire pricing structure if not immediately, then certainly from the first of July.” Managers should be progressively reviewing prices as the costs come in place, rather than having to go in for the one big hit which is more noticeable for their customers, he said.

“The industry’s already pretty lean and mean; it has always had to be because it’s incredibly competitive. But with these increased costs for energy, commodity prices are going up, rates are up, and certainly wages are going up. We are seeing significant inflationary costs and hospitality input costs right now, and there’s only one thing that can happen - prices go up, or businesses fail,” says Robertson.

This will require an extra push of service from the hospitality industry, as customers are more picky with their spending and aware of what a night out costs.

“As the discretionary dollar dries up and the economy hardens, our consumers have got less to spend on a meal or a few beers. They’re more inclined to be attracted to the supermarket’s loss leaders, and entertaining at home rather than going out,” says Robertson.