Consumer goods companies walk a tightrope as inflation surges

By Uday Sampath Kumar

(Reuters) - Big global brands Pepsi and Levi Strauss told investors this week they offset inflation with price increases, but rising costs of everything from aluminum to cotton signal tighter times ahead for consumer goods companies.

Freight costs and raw material prices have surged this year across industries due to global supply chain disruptions, squeezing profit margins at companies looking to recover from the impact of the COVID-19 pandemic.

To cushion the blow, PepsiCo (NASDAQ:PEP) Inc and Levi Strauss & Co (NYSE:LEVI), among the first batch of consumer product companies to report quarterly earnings, have raised prices for jeans, snacks and sodas, helping results exceed expectations.

While those companies were able to pass along costs to consumers, higher prices will be a headwind until at least the end of the year with some industries likely facing pressure until the middle of 2022, analysts have said.

With government data showing inflation has started to dent consumer spending, companies must also balance the need to protect their margins with the risk that boosting prices will hit demand for their products.

Analysts at Credit Suisse (SIX:CSGN) characterized the breadth of inflation PepsiCo faced as "stunning".

"We expect margin pressure to be the predominant theme through the rest of this earnings season," they said. J.P.Morgan's Andrea Teixeira said PepsiCo "is feeling and will continue to feel the impact of inflationary pressures and supply chain challenges."

But Ramon Laguarta, PepsiCo's chief executive officer, is confident even as the company faces higher packaging material costs and truck driver wages.

"Across the world, consumer seems to be looking at pricing a little bit differently than before," Laguarta said in an analyst call, highlighting the strength of the company's brands and innovations.

That sentiment was echoed by Slim Jims maker Conagra Brands (NYSE:CAG) Inc. Levi's said previous price increases, which helped boost the jeans maker's gross margins, would allow it to offset expected higher cotton prices next year.

However, some companies are feeling the pinch more than others.

Corona beer maker Constellation Brands (NYSE:STZ) said on Wednesday the benefits from price increases and a cost savings program are expected to be more than offset by higher prices for commodities including aluminum, diesel and wood.

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PepsiCo keeping up with demand during the pandemic while also grabbing market share has given the company strong pricing power, where as Constellation, which struggled to keep up supplies has comparatively less capacity to raise prices, said Markus Hansen, Portfolio Manager at Vontobel Quality Growth, which holds stakes in both PepsiCo and Constellation.

"PepsiCo wasn't shooting down the idea of price increases in the mid single-digit range - 4% or 5%. That's a pretty powerful thing," Hansen said, adding that for Constellation he was looking at a low single-digit range.