The head of Wal-Mart’s U.S. operations, Bill Simon, recently warned USA TODAY’s editorial board that U.S. consumers face “serious” inflation in the months ahead for clothing, food and other products. “We’re seeing cost increases starting to come through at a pretty rapid rate.”
John Long, a retail strategist, anticipates prices will start increasing at all retailers in June. Long says labor costs in China and fuel costs for transportation are taking a toll on retailers. “Every single retailer has and is paying more for the items they sell, and retailers will be passing some of these costs along,” Long says.
“Except for fuel costs,” says Long, “U.S. consumers haven’t seen much in the way of inflation for almost a decade, so a broad-based increase in prices will be unprecedented in recent memory. No retailer is going to be able to wish this new cost reality away. They’re not going to be able to insulate the consumer 100%.”
And a March 31 grain report in Reuters indicates commodities will go even higher because of dwindling grain stocks:
“Farmers will struggle to replenish rapidly shrinking U.S. grain stocks this year, despite plans to sow the most land to corn since World War Two and near-record acreage to soybeans, two U.S. government reports showed on Thursday.
“Chicago corn prices surged their daily limit, while soybeans and wheat jumped more than 3 percent as traders looked past higher-than-expected figures in the Department of Agriculture’s annual planting survey to focus on inventories, which fell much more than forecast.
“The report underscored the fact that U.S. farmers are now reaching the limits of arable land in the world’s biggest crop exporter, with increased corn sowing coming at the expense of soybeans and cotton. The spring wheat crop, while among the biggest in decades, could yet shrink.”
Restaurants Scramble to Reduce Supply Costs
Restaurants are desperate to reduce the costs of higher prices for grains, meat, sugar and other ingredients. According to the Wall Street Journal, Starbucks wants to team up with other companies to buy milk, sugar and other essential food items to allow them more purchasing power. “We are looking for innovative ways to navigate through this,” Starbucks Chief Executive Howard Schultz says.
And Darden Restaurants Inc., owner of the Red Lobster and Olive Garden chains, is implementing a new system of purchasing only the supplies it immediately needs — a system Japanese car manufactures have used for years.
Michael Swanson, an agricultural economist at Wells Fargo & Co., points out the risks inherent in buying supplies only when they’re needed. “They could be exposed to more day-by-day spot-market volatility since they have to buy more often. Another downside is if you’re expecting a light day but there’s more demand than you predicted.”
To cut costs, Texas Roadhouse changed its beef purchasing policy from a once a year locked in price for all beef to buying just 80 percent, and then shopping around for competitive prices on the open market for the remaining 20 percent. And instead of using one commodities supplier, they’re purchasing from multiple suppliers to find a better deal.
Some restaurants aren’t accepting price increases from their suppliers without analyzing the makeup of every product they buy, and tracing the price of every component.
WSJ’s Julie Jargon notes that for its Red Lobster chain, Darden breaks down the biscuit mix cost of each ingredient, such as flour and shortening, as well as the packaging cost in order to quantify the price for each product, then occasionally hedges the price of the wheat that goes into the flour.
Struggling Eateries Reluctant To Raise Prices
Since a key objective in running a business is to savagely reduce operating costs, you’d think these revamped corporate strategies aimed at cutting commodity costs would have been implemented from the day these restaurants opened their doors for business.
With record numbers on food stamps — total food stamp participation in January hit an all time record 44,187,831 according to the USDA — more consumers are economizing by cooking and eating at home.
And the eating-at-home trend has been further fueled by the perception that homemade meals are healthier than restaurant cuisine, says Market Wire. That’s why restaurants have been reluctant to raise prices, but now it appears most of them will have little choice.