Just as the economy is clawing its way out of the ditch of a two-year recession, 2011 may be the year the price whiplash smacks consumers: feedstock and commodity prices began rising last year for everything from coffee to strollers. Consumers started paying the price in the fourth quarter. Now it looks like they will continue to do so this year.
This week, McDonald's said it would likely increase prices for some of its items by between 2% and 2.5% in 2011. Companies like Kraft -- which increased some prices last year -- and Sara Lee have also said they will boost consumer pricing in 2011.
Also this week, Evenflo -- an infant and juvenile products brand that has staked out a position on value pricing -- is following suit.
The Miamisburg, Ohio-based privately held company says it is boosting prices 7% to 10% across its full product line. The increase, which goes into effect Feb. 15, will be the first such move by the company in three years. It reflects upward pressure on commodity and other costs similar to those being felt by consumer manufacturers across the globe.
"Evenflo is seeing double-digit cost increases in virtually every building block of our business, and up until now we've been able to avoid passing along any price increases through careful and aggressive cost reduction programs," said Robert Conley, president of Evenflo, in a statement. "But the continued upward pressure in direct and indirect costs is necessitating a shift in our pricing strategy. Given the environment we're operating in, we've kept the increases as modest as possible."
The company is a supplier to retailers like Toys "R" Us, Babies "R" Us, Wal-Mart, Target, and K-Mart.
Price run-ups started last year. General Mills on Nov. 15 lifted prices by single-digit percentage points on cereal brands, and early this year on baking products. The company makes brands like Betty Crocker and Cheerios and Lucky Charms. Kraft started increasing prices for coffee and packaged foods last year. Its Maxwell House and Yuban brands got price increases of 12% for traditional and 4% for instant coffee. In September last year, Starbucks said it would increase prices on some of its larger-sized drinks as well.
Bob Goldin, executive VP of Chicago-based restaurant consultancy Technomic Inc., says the last commodity price spike was two years ago, but that increases across the board are unusual. "It is more volatile now than it has been in a long time," he says. "When commodities take big run-ups in price, generally speaking, it's not more than one or two commodity groups. But this is really unique." The firm estimates prices at restaurants alone will head up by as much as 3% this year.
The increases are not merely the case of commodities returning to post-recession benchmarks. "Some are reaching new heights. The prevailing opinion is that a lot of this is driven by huge demand from developing nations, most notably China."
One beneficiary of major brands lifting prices may be private-label packaged goods. "It will certainly make supermarket brands more attractive to consumers," says Goldin. "So raising prices doesn't necessarily mean realizing returns."
Joan Holleran, director of research at Chicago-based consultancy Mintel, tells Marketing Daily the firm is tracking the consumer price index for 2011, which suggests a 2% to 3% increase across the board for consumer goods. "Really, the more unusual thing is that prices only went up in 0.8% last year," she says. "And that could have been driven by companies like McDonald's trying to keep menus focused on value."
Holleran points out that at same time, restaurants and companies like Starbucks did well because they sold higher-margin items. "Starbucks might have tried to keep prices low but introduced specialty drinks that are more pricey." Crude oil, corn and grain prices are heading up but Holleran points out that people are not going to stop eating bread just because a loaf costs five cents more. And she says private-label brands will continue to push the value and quality message versus national brands, as they always have.