THEY SEE INFLATION

News out this weekend on Sysco confirms what we’ve been saying.  Inflation is not coming tomorrow or the next day; it's here.

Sysco has raised prices, sending out an alert announcing an “Act of God” to address their contracted supply issues.  The cold snap that has impacted temperatures in North America of late is having a profound impact on produce crops.  “The last time there was a freeze of this severity was 1957”, according to Jerry Wagner, director of sales and marketing for Nogales, AZ-based Farmer’s Best.  The bottom line is this: prices for produce all over North America will be lifted by these events over the next few months.  Whether or not the wheat crop in the U.S. was damaged remains to be seen.  What we do know is that supplies of tomato, peppers, and cucumbers from Mexico have been disrupted and Florida’s produce crops have been impacted by severe freeze damage in December and January.  Restaurant management teams have been eager to wait for competitors, be it among grocers or fellow restaurant companies, to raise prices first.  Sysco is taking the plunge and others – grocers and restaurants alike – are sure to follow soon.

Here is a small sample of quotes from management teams referring to inflation during recent earnings calls that we found using AlphaSense.

 


Chipotle Mexican Grill, Inc.

“Commodity inflation has continued to push our food costs higher in 2011 already, and we expect continued inflationary pressure on many of our ingredients, especially chicken, beef and avocados during the year.”

“Using the fourth quarter food costs of 31% as a starting point, we anticipate additional overall food cost inflation will likely climb to the mid-single digits during the year.”

“We're in the process of sorting through the impact of recent freezes in Mexico and Florida where our tomatoes, green peppers and tomatillos are currently grown. The cost of these items has surged three-fold as a result of severe crop loss, which if we remain fully supplied would increase our food costs by over 200 basis points.”

“While we continue to believe we have as much if not more pricing power than other restaurants, we plan to hold off on any menu-pricing decisions until later in the year, which will allow us to see how inflation plays out on a sustained basis and allow us to see how consumers react to price increases from other restaurants and grocers.”

“So it's obvious that food inflation is real, and it appears it will get worse before it gets better.”

“And inflation means that at some point we're going to have to pass on those higher costs to our consumers.”

 

Kraft Foods, Inc.

“Looking forward, in the face of substantial input cost inflation, we're in the process of implementing another round of price increases in our North American portfolio. While this will pressure margins in the near term, we'll use a combination of pricing, productivity and overhead savings to improve margins for the full year.”

 

Cheesecake Factory, Inc.

“Based on our forecast for the entire year, taking into account non-contracted items and contracted items with estimating and forecasting the non-contracted items, we would expect food cost inflation currently to be about 3% for us for the year, with that falling a lot heavier, as we said, in the first half of the year, with 4% in the first half of the year and around 2% in the second half of the year. So you would see more food cost inflation, in addition to being in the first quarter, you will see some more food cost inflation in the second quarter.”

Pepsico, Inc.

“Like every other CPG company, we expect to see very high levels of inflation in 2011. We are driving productivity to offset as much of the inflation as possible, and in normal circumstances we'd have addressed the remainder of the inflation with pricing. But the consumer landscape, particularly in developed markets, is shaky. And for that reason, we're going to be very judicious in our pricing actions, because we don't want to shock the consumer with high levels of pricing and dampen demand for our products and categories.”

"The expected economic and consumer-led recovery that had been predicted earlier in the year never really materialized in developed markets and, due to a variety of factors, inflation has dramatically increased across both developed and emerging markets."

Yum! Brands, Inc.

“In terms of headwinds, commodity inflation will be a challenge across all divisions. We plan for 5% food and paper inflation in China, along with 4% in the U.S. and 3% in YRI.”

“Our philosophy in general is we like to go with smaller, earlier price increases than waiting until you have to take it and then having a large increase. We think that, generally, the consumer handles that better.”

McDonalds, Inc.

“When we factor all of those things together, including inflation, we do have the opportunity to pass some of those costs along in price increases, but as Pete said in his comments, not all of those in every market.”

Safe Bulkers, Inc.

“Given the large increases in food prices recently and the effect – the effect that inflation has had in Tunis and Egypt we have seen some stockpiling of grain.”

Philp Morris International, Inc.

“In addition, inflation, particularly as it relates to basic food commodities, remains a concern relative to consumer discretionary income levels in numerous markets.”

Sysco Corp.

“And so in the press release, just to read from it, it said inflation I think caused – significant food cost inflation negatively impacted our customers' purchasing budgets.”

Howard Penney

Managing Director