ZAANDAM – An Albert Heijn distribution center is running at full capacity.Image Dutch Height / ANP

    “It is immoral that companies are making record profits at the expense of the poorest,” UN Secretary-General António Guterres said recently while presenting a report on the impact of Russia’s invasion of Ukraine. Guterres wants governments to tax the fossil fuel industry more as companies like Shell and BP are making record profits amid a gas crisis.

    But not only oil and energy companies are accused of “grotesque greed.” The discrepancy between the rosy quarterly figures of food companies and a growing number of households experiencing payment difficulties is also increasingly skewed. Because while customers pay an average of 12 percent more for their groceries than a year ago, multinationals such as Danone, Nestlé and Heineken saw their profits increase in the past six months.

    The sky-high bill for raw materials and energy? For the time being, this seems to be mainly on the consumer’s plate.

    Real prices

    Yet it is not the case that all companies simply pass on their costs or increase their prices unjustly, says economist Sebastiaan Schreijen of the Rabobank. ‘Many people now have that gut feeling, but the cost increases that we see due to the shortage of energy, raw materials and personnel do affect the entire chain.’ These extra costs are so high that companies have to raise prices in order not to compromise on their margin. ‘They owe that to their shareholders too.’

    Moreover, by no means all producers are able to fully offset their costs. ‘Not all companies can raise their prices equally easily.’ Bread, for example, has risen in price less than expected due to the high grain and gas prices. The Dutch Bakery Association states that the millers as well as the bakers and supermarkets are taking part of their margins to achieve this. Suppliers of greenhouse fruit and vegetables also had to compromise on their margins.

    There will undoubtedly be some companies that take advantage of inflation, Schreijen thinks, ‘but manufacturers must be able to justify cost increases to their customers.’ The economist therefore expects retail chains to somewhat curb the unrealistic price increases. At the beginning of this year it became clear that the negotiations between the suppliers and the large supermarkets are getting tough. Brands such as Nestlé and Coca-Cola even temporarily disappeared from the shelves, because the supermarkets did not agree with the higher prices.

    Nevertheless, the listed food manufacturers and suppliers now seem to have a stronger negotiating position. For example, JDE Peet’s, the parent company behind, among others, Douwe Egberts and Senseo coffee, and Unilever (including Calvé, Dove, Magnum) saw their turnover increase sharply this year thanks to price increases. Although a higher turnover does not necessarily mean more profit, because production costs also increased. While coffee prices in supermarkets are currently about 18 percent higher than last year, the operating profit of JDE Peet’s retail activities in Europe fell by almost 18 percent.

    Although the turnover of supermarket group Alhold Delhaize was 6.4 percent higher in the past quarter due to the high prices, the company said it had to sacrifice profit margins to keep the products on the shelf affordable.

    Corona effect

    That does not mean that there are no producers at all who are taking advantage of the high inflation. For example, Danone and Nestlé achieved 5.1 and 6 percent more profit, respectively. Beer brewer Heineken even saw its net profit grow by 22 percent. One by one they increased their prices and yet they sold more.

    However, for companies that record profit growth, we also have to take into account a possible corona effect, says ING economist Bert Colijn. According to him, comparing the current half-year figures with last year gives a distorted picture, because the world was still in the middle of the corona crisis at the time. ‘Profits of companies can also be driven because there is much more demand. For example, in companies that supply to catering establishments.’

    A higher turnover there can outweigh the disappointing retail sales and higher production costs of companies. As happened at JDE Peet’s, where the declining profit in the stores was partly offset by growing demand for out-of-home products. Thanks to the reopening of offices and catering businesses, profit within that branch rose by 140 percent.

    Less confidence

    The fact that companies are indeed struggling with the high costs and less demand is also reflected in the confidence in the stock market. For example, the share of the American Kraft Heinz, despite a doubling of net profit in the first half, fell by 8 percent after the announcement of the quarterly figures. Although the company had more leftovers at the bottom of the line thanks to tax and interest benefits, gross profit fell due to higher raw material prices. Investors fear that consumers will switch to cheaper competitors, now that Heinz is passing those higher costs on in product prices.

    Unilever, which claims to pass on ‘only’ 70 percent of the higher costs, is also experiencing more competition from cheaper brands now that prices are rising. This competition is good news for consumers. Most manufacturers are not expected to raise their prices more than is strictly necessary for fear of losing customers. However, manufacturers will find other ways to cut costs. Schreijen: ‘In order not to break the psychological price barrier of their products, they can also adjust the contents of their packaging, for example.’ This phenomenon is known as shrinkage inflation.

    Consumer continues to shop

    Rightly or not, the consumer will for the time being dig deep into their pockets in the supermarket. Although demand for commodities is beginning to decline due to inflation and a looming recession, some of the higher costs in the food chain have yet to be passed on. Economists from ABN Amro and Rabobank, among others, predict that prices will only peak later this year. Not to mention the energy bill and other expenses.

    ‘Due to high inflation and the lack of wage growth, we are faced with declining purchasing power’, says ING economist Colijn. Although we still see little of this in the turnover figures of companies. As with passing on the costs, you see some delay in purchasing behaviour, explains Colijn. “People are still catching up on holidays and dinners after the past corona years.” ING has seen a slight decrease in debit card transactions since June. ‘It seems that consumers are starting to make choices, but the real effect has yet to become apparent.’

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