This is an English adaptation of a FoodBud historical article originally published on October 13, 2021.
How many brands really have pricing power?
FoodBud had previously covered the rise in coffee-bean prices, driven mainly by drought in Brazil and export shipping problems in Vietnam. More recently, oat prices have also been climbing.
On September 14, Reuters reported that Brazil’s coffee shipments in August had fallen to their lowest level in a year as global shipping problems worsened.
Brazil’s green coffee exports in August fell 27% year on year to 2.33 million bags, with each bag weighing 60 kilograms, as exporters struggled to secure containers and shipping space. Brazil is currently the world’s largest coffee producer and exporter. Brazilian coffee accounts for nearly 40% of global coffee trade; in 2020, exports reached USD 5 billion, or roughly 16% of total global coffee exports.
Coffee has to move in containers rather than as bulk cargo. With container shortages and sharply higher shipping costs, Vietnam’s exports have also been hit hard. One-third of the world’s robusta coffee comes from Vietnam, and prices for this bean type had surged 30% over the previous three months.
As the global economy recovered in 2021, demand in international ocean freight outstripped supply, affecting South Korea’s food industry. Some large fast-food chains faced prolonged shortages of imported raw materials.
During this period, fries were either long out of stock or in short supply across most McDonald’s stores in South Korea and at some outlets of several other fast-food chains. The reason was that most frozen fries used by Korean fast-food restaurants were imported from the United States, while tight global shipping capacity, container shortages and port labor constraints disrupted the frozen-fries supply chain. Companies were increasing order volumes and seeking additional supply channels from other countries to ease the shortage.
The pressure was not limited to fries. Imported frozen strawberries, pickles, cream and other imported foods that sold well on South Korean e-commerce platforms were also frequently out of stock. Some Vietnamese pho restaurants briefly faced a situation where their main ingredient, imported rice noodles, could not arrive on time. Restaurant operators said rice noodles imported through other channels had doubled in price; with business already weak under the pandemic, continued pressure could force them to suspend operations.
Coffee was another import category under strain. South Korea is a major coffee-consuming country, with adults consuming close to one cup per day on average. Coffee imports had also risen year by year, and the previous year’s import volume was the highest since records began in 2000. Vietnam, which accounted for about 20% of South Korea’s coffee imports, was affected by pandemic lockdown measures that reduced coffee output and limited exports. Major Korean coffee-bean suppliers raised coffee-bean prices by about RMB 5-16 per kilogram, with increases of up to 15%.
Major U.S. companies were racing to find ways around historic shipping delays. Large retailers from Walmart to Costco began chartering their own vessels to avoid congestion at the Port of Los Angeles ahead of the holiday shopping season.
For home-improvement giant Home Depot, the idea started almost as a joke, but became a way to protect supply of some goods. Sarah Galica, the company’s vice president of transportation, said executives were looking in May for new ways to move goods to port faster when someone suggested chartering a private ship. By June, Home Depot had not only chartered its own vessel, but also airfreighted items such as power tools and bought goods on the spot market at costs that could be as much as four times the previously agreed contract price.
Home Depot was one of many large retailers turning to chartered ships. Walmart, Costco, Target and IKEA also adopted the approach. More recently, Coca-Cola also began chartering bulk carriers to move raw materials, using ships more commonly associated with coal, iron ore and grain.
These chartered ships were much smaller than traditional container ships. On average they carried about 1,000 containers, compared with up to 22,000 twenty-foot containers on a conventional container ship.
Americans are used to eating cereal for breakfast, but the price of that staple was rising fast. Oat futures on the Chicago Mercantile Exchange reached a record high.
Analysts believed the sudden rise in oat prices had not yet passed through the supply chain to consumers, but that it would eventually arrive. Reduced supply and surging prices were expected to affect popular breakfast foods such as cereal, oatmeal and granola.
Randy Strychar, an agricultural commodities researcher and head of the Oatinformation website, noted that Cheerios, one of the most popular cereals in the United States, is made entirely from oats, and that the ingredient cannot simply be replaced.
Oatly Group AB, the world’s largest oat-milk company, was sourcing oats from Canada, the Baltic region and other countries to ease the pressure from rising prices. Smaller North American oat-milk producers could be forced to raise prices.
On the demand side, the popularity of oat milk had also lifted demand for oats. As consumers shifted toward plant-based foods, Sweden-based Oatly attracted strong investor interest after listing. It became another plant-based star company after Beyond Meat and Impossible Food. After its listing, Oatly’s market capitalization exceeded Beyond Meat’s, reaching USD 12.275 billion. In China, oat milk had also become a popular startup category.
On the evening of October 12, Haitian Flavouring and Food, often nicknamed the “Moutai of soy sauce” and then valued at nearly RMB 500 billion, announced that it would adjust factory-gate prices for some products, including soy sauce, oyster sauce and other sauces. The company cited continued increases in major raw-material, transportation and energy costs, and said the move was intended to help it continue providing quality products and services while supporting sustainable market development.
The main product price adjustments ranged from 3% to 7%, with the new prices scheduled to take effect on October 25, 2021.
Haitian said the partial price adjustment could have some impact on market sales, making the effect on future performance uncertain, and reminded investors to pay attention to investment risks.
The market had already expected a price increase from Haitian. On the evening of September 26, the company issued a clarification regarding market rumors about product price adjustments. It said that since the beginning of the year, sharp increases in major raw-material, transportation and energy costs had brought operating challenges. The company was evaluating whether to adjust product prices, but no final plan had yet been determined.
Haitian also said that if a price adjustment plan were implemented, it would affect costs, profits and the market in multiple ways, leaving uncertainty over whether future performance would improve.
In the secondary market, investors had also priced in expectations of a Haitian price increase. From mid-September, the share price continued to rise, gaining more than 30% in less than a month.
The conclusion was blunt: pricing power makes a difference.
Note: IPO, market capitalization, share-price, forward-impact and implementation-date figures are historical as of the original October 13, 2021 article.