The Walmart Inflation Test (Part 1)

For all you CPG and food companies in the audience (not to mention manufacturers), it should be no surprise that many producers are beginning to pass along the impacts of commodity price inflation, longer lead-times and in certain cases, additional supply constraints in their products. This recent CNBC story on Walmart says that, according to MKM Partners, prices at the retail giant have climbed .6% in the past two months which suggests, if the current rate of inflation holds, "prices would be close to four percent higher a year from now, double the Fed's mandate." CNBC quotes the MKM analyst who authored the research note, noting that the "price survey shows a small, but meaningful increase on an 86-item grocery basket." And we all know if Walmart is raising prices -- versus rolling them back to get consumers in the big box doors -- something inflationary must be afoot.

In recent discussions with procurement executives and the consultants they work with, Spend Matters has observed that commodity price volatility -- limited but not included to inflationary pressures -- is, perhaps, the most pressing concern and focus at the moment. Yet many feel at least partially powerless to tackle the area owing to the difficulty of passing along price increases to customers in an environment where suppliers are exercising greater pricing power than before, refusing to commit to anything much longer than a spot-market price commitment in many cases for underlying materials. As CNBC suggests in the Walmart article, even the largest CPG companies are not immune. Consider that the "biggest dollar increase in [the] survey was on a jug of Tide Original laundry detergent, manufactured by Procter & Gamble." Yet P&G "gave tentative forecasts for this quarter on concern they won't be able to pass rising input costs on to the consumer" even if it appears they've started to do so already.

Thanks to a variety of reasons, including rising energy/oil costs (which, in P&G's case with Tide can result in higher surfactant costs, driving up consumer prices and transportation costs), poor harvests (and the diversion of food production to energy, in the case of corn and some sugars for ethanol), longer lead times for raw materials and production capacity, regional/global demand in emerging markets, inflationary pressure in China, investor speculation and other factors, prices for consumer food, CPG and durable products are already showing signs of inching up if the Walmart data is to be believed (and that's despite a mediocre-at-best economic outlook as well as high unemployment). In Part 2 of this post, we'll continue this quick analysis, further exploring why everyone should pay extra-special attention to the Walmart inflation test.

Jason Busch

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