In tug-of-war over prices, grocers seek to wrest some control from food companies

One of the largest retailers in Europe has a message for one of the world's largest food companies: Your days of unquestioned price increases are over.

Carrefour, with 12,000 worldwide locations, pulled Mountain Dew, Cheetos and other PepsiCo brands from shelves.

"We no longer sell this brand due to unacceptable price increases," read signs informing shoppers in France.

It could happen here as well.

Food companies have had the upper hand in recent years, passing along price increases as retailers felt they had no choice to keep shelves stocked. They passed those price increases along to consumers, who kept paying up.

But relations between grocers and suppliers have fractured and the power dynamic is shifting. Many of the underlying reasons for price increases have faded, and shoppers are fed up with high prices and turning away from big brands.

"Part of the anger and frustration retailers feel is this hopelessness, watching this cost spiral, not knowing what the consumer is going to do," said Will Davis, co-founder of Minneapolis-based retail negotiating firm Conlego. "They are the last line before prices hit the customer, and they feel like they're left holding the bag."

The cost of groceries has increased 25% over the past three years. And unlike many other goods, those prices are not coming down far, or quickly, as inflation slows.

Food manufacturers have pumped the brakes on price increases after several years of passing along their own increased costs — while hitting record profits.

But the damage has been done; consumers are buying fewer products from companies like General Mills and Hormel, a trend that needs to reverse if the Minnesota-based food giants hope to get growing again.

"Consumers are weary of elevated grocery prices," reads a Deutsche Bank report that predicts food companies will fold to retail pressure to get more promotions and lower prices on shelves this year.

Last fall, Walmart's CEO gently rattled the saber and said, "The pockets of disinflation we are seeing are helping, but we'd like to see more faster." But most retailers are keeping their supplier battles private for now.

The Carrefour/Pepsi breakdown is an extreme but not unprecedented example of just how ugly some relationships have gotten due to price increases.

"Higher prices originally may have been valid to some extent, but now we have enough supply in the supply chain and costs have come down tremendously," Conlego CEO Daniel Duty said. "Companies will say labor is more expensive — they always have an excuse. But it just doesn't match the reality of what we're seeing in the marketplace."

Pandemic's power imbalance

After the lockdowns came nearly four years ago, grocery stockpiling and a subsequent whiplash back to "normal" all contributed to the fundamental supply and demand problem that led to higher prices.

"There was a real moment of: How are we going to get product to shelf? We'll pay whatever it takes," said Davis, a Target alum.

As price increases continued, questions about those price hikes were dismissed with a few key words: gas prices, supply chain snarls, high commodity prices and higher wages and benefits.

Duty, who founded Target's negotiations and partnerships team and negotiated Michael Jordan's appearance on Wheaties boxes for General Mills, said part of the problem is that retailer-supplier relationships have become more transactional and less personal.

"A supplier sends over a cost increase at 4 p.m. Friday and says, 'Next week we're taking up our prices and, by the way, I'm out for the weekend,'" Duty said. "So merchants and the buyers are like, 'What the hell, can we have a discussion about this?'"

Collaboration, Duty said, is too often seen as a four-letter word.

"The reality is collaboration is hard," he said. "Because you really have to work at finding that expanded value," i.e. growing the pie so retailers and suppliers can both succeed.

More specials and coupons in 2024?

When prices do come down this year, it may be for a limited time only.

Discounts and special deals are expected to bounce back in 2024 after years of below-average promotional activity.

Among large food companies, 31% of food sales were on promotion last year, compared to 36% in 2019, according to Piper Sandler.

The Minneapolis-based investment firm predicts many brands will be forced to offer more discounts this year, "especially as easing costs are pushing private label pricing down." This has expanded the gap between Lucky Charms and Magic Treasures (Walmart's version of the cereal).

The power of name brands has given most retailers a reluctance to push back. But Davis said they can and should point to viable alternatives like generic and store brands.

General Mills has especially lagged the industry in discounting its cereals and pancake mixes, with just 27% of last year's sales coming on promotion, according to Piper Sandler.

"There will likely continue to be investor concern about elevated price points and the need for greater promotional [investments]," Barclays analyst Andrew Lazar wrote about General Mills last month. It's a sentiment mirrored by others watching the industry.

"The consumer is responding to promotions, and so the market is responding accordingly," Target chief growth officer Christina Hennington told investors in November.

Executives at UNFI, the national food distributor that owns Cub grocery stores, also expects promotions to increase throughout the year.

"The consumer is stressed right now, and it's important that they have good value," UNFI chief executive Sandy Douglas told investors in December.

Consumers are stressed

General Mills has long acknowledged that consumers are stressed, but the Golden Valley-based company has defended its price increases as justified by pointing to the increased costs to make, move and market crescent rolls and pizza bites.

"Consumers are still getting used to new prices in the marketplace," CEO Jeff Harmening said last month. "Whether that's food or gas or rent or any number of things ... it'll take a little while for consumers to settle into what new price points are."

Hormel chief executive Jim Snee had a similar line in November: "I don't believe that consumers have fully digested all of the pricing that has come through."

The Austin, Minn.-based company was more willing to come out and say discounts are on the horizon.

"There's an opportunity to reset promotions," said Hormel's head of retail, Deanna Brady. "Ensuring that we have the best and most productive promotions out there ... that's really what's going to be impactful to helping drive the business for growth."

Duty, at Conlego, said that means collaborating.

"What we're telling retailers is this is a problem-solving exercise," he said. "It's not about who has more power, who's going to win. Yes, that comes into consideration, but how do we solve the problem?"