Corporate America’s new dilemma: raising prices to cover higher transport costs
By Eric M. Johnson, Chris Prentice FEBRUARY 26, 2018 / 1:32 AM
SEATTLE/BOCA RATON, Fla. (Reuters) - The drive for cost cuts and higher margins at U.S. trucking and railroad operators is pinching their biggest customers, forcing the likes of General Mills Inc (GIS.N) and Hormel Foods Corp (HRL.N) to spend more on deliveries and consider raising their own prices as a way to pass along the costs.
FILE PHOTO: Freight trucks are driven on the Fisher freeway in Detroit, Michigan, U.S., March 27, 2009. REUTERS/Rebecca Cook/File Photo
Interviews with executives at 10 companies across the food, consumer goods and commodities sectors reveal that many are grappling with how to defend their profit margins as transportation costs climb at nearly double the inflation rate.
Two executives told Reuters their companies do plan to raise prices, though they would not divulge by how much. A third said it was discussing prospective price increases with retailers.
The prospect of higher prices on chicken, cereal and snacks costs comes as inflation emerged as a more distinct threat in recent weeks. The U.S. Labor Department reported earlier this month that underlying consumer prices in January posted their biggest gain in more than a year.
As U.S. economic growth has revved up, railroads and truck fleets have not expanded capacity to keep pace - a decision applauded by Wall Street. Shares of CSX Corp (CSX.O), Norfolk Southern (NSC.N), and Union Pacific Corp (UNP.N) have risen an average 22 percent over the past year as they cut headcount, locomotives and rail cars, and lengthened trains to lower expenses and raise margins.
Quickening economic growth, a shortage of drivers and reduced capacity, and higher fuel prices have driven up transportation costs, prompting some companies to threaten to raise prices on goods ranging from chicken to cereal.
Cream of Wheat maker B&G Foods Inc (BGS.N), Cheerios maker General Mills and Tyson Foods Inc (TSN.N), owner of Hillshire Farms brand and Jimmy Dean sausage, said they will pass along higher freight costs to their customers.
Tyson Chief Executive Officer Tom Hayes told Reuters in an interview that its price increases ”should be in place for the second half” of its fiscal year, and that it has begun negotiating price increases with retailers and food service operators. The company declined to specify how much its freight costs increased in recent months, but a spokesman said they are up between 10 to 15 percent for the total industry.
General Mills informed convenience store and food service customers of the price increases directly, a spokeswoman told Reuters in an emailed statement, declining to provide specifics. Chief Executive Officer Jeff Harmening cited logistic costs and wage inflation as factors.
”It feels to me like an environment that should be beneficial for some pricing,” he said in a presentation at last week’s Consumer Analyst Group of New York conference.
Hormel Foods, the maker of Skippy peanut butter and SPAM, has been talking with retailers about raising prices, according to Chief Executive Jim Snee.
“We don’t believe we’re going to recoup all of our freight cost increases for the balance of the year,” Snee told Reuters in an interview, noting operating margin sank to 13.2 percent, from 15.6 percent due to higher costs - including freight - in the most recent quarter.
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