Food costs are down, but grocery bills are still up. Here’s why

New York (CNN) Why don’t prices fall at the grocery store? When food manufacturers started raising prices a few years ago, they blamed out-of-pocket costs, including higher ingredient prices. But ingredient prices have actually been on the decline for months, and individuals are still paying more for food.

In part, that’s because food producers have other expenses that remain expensive, such as labor and transportation, compared to a few years ago.

But critics and industry experts say the cost increases gave food producers cover to raise prices above what those increases required, boost profits and correct what they saw as too low prices in previous years.

And now that they’ve seen that people would pay more, they’re in no rush to give up profits by charging less.

“When costs change, especially when costs change in a very publicized way,” it’s not uncommon for companies to use the moment to raise prices, said Jean-Pierre Dubé, a marketing professor at the University of Chicago Booth School of Business. “Companies see these as occasional opportunities and they don’t want to miss anything.”

Between January 2022 and January 2023, groceries became 11.3% more expensive. Many food companies predict that they can slow or stop price increases – but not lower them.

Agricultural commodity prices are down after peaking in May, according to the USDA. And the downward trajectory continues: Commodity prices for wheat, coffee and cocoa fell in the last week of February, according to a recent Rabobank report. But ingredients usually make up a small part of the total food cost. Manufacturers mostly pay for other things such as transport, packaging and wages.

“There has been pressure in the supply chain, and there has been an increase in raw material costs. However [companies] have, I think, taken price increases that exceed that,” said Mark Lang, an associate professor of marketing at the University of Tampa who specializes in food marketing. “They are, to me, absolutely profit-taking.”

Conagra (CAG) and Hershey (HSY) reported higher profits in recent quarters, year over year. PepsiCo (PEP) and Coca Cola (IS) reported profit growth in the third quarter, before seeing a decline in profit later in the year.

Companies are maintaining high prices, or continuing to raise them, at a time when many Americans are already struggling to pay for food, especially as food stamp benefits from the pandemic expire. “This kind of activity greatly reduces the standard of living for the country,” Lang said.

“Endian Possibilities”

Inflation can give companies a reason, or an excuse, to raise prices that buyers will accept.

A few years ago, food producers started raising prices very quickly, because in addition to the headline news — like [meant] consumers weren’t going to complain – everyone raised their prices,” Dubé said. “And it took a while for the consumer to understand that prices have gone up.”

Some shoppers may not have noticed slightly higher prices for individual items, or that they’re paying the same amount for less product, known as shrink inflation, even though they may have realized their dollars weren’t going as far at the supermarket.

But even if they monitored the changes, people can’t just stop buying food. Many have cut back on restaurant visits or shopped at less expensive chains and locations. Others shop at budget stores, such as Aldi. Some people may throw treats in the store to replace more expensive luxuries.

So people continue to buy food at the grocery store, despite higher prices—giving producers an opportunity to convince retailers that the higher prices won’t drive customers away.

“The price was simply too low”

Retailers want food producers to keep prices low. It works well for them, and for consumers, but not for producers.

Asked at a conference in February how Conagra was able to raise prices without losing volume sales, CEO Sean Connolly said that “prices were too low in the frozen pre-pandemic,” adding, “what we’ve been able to illustrate to retailer is that consumers will welcome a $4.50 unit,” because at that price a frozen meal is still a good value.

Conagra, which makes Marie Callender’s, Birds Eye and Healthy Choice frozen pizzas and buns, said the higher price points have allowed it to improve ingredients. In the quarter ended Nov. 27, it reported net income of $382.2 billion — up roughly 39% year over year.

During its fourth-quarter earnings call, Coca-Cola was asked about reports of retailers pushing back on prices. “We’ve earned the right to price with consumers,” said CEO James Quincey. If it can demonstrate that people will pay more for Coke, it could convince retailers that higher prices will be good for them, too, Quincey said. Coca-Cola said it plans to continue raising prices globally, noting that input costs remain higher than usual.

Prices will eventually fall, predicts Tom Bailey, senior consumer food analyst at Rabobank. Some items, such as lettuce and tomatoes, have already become cheaper at the grocery store, according to government data.

If and when companies moderate their prices, Bailey said, they must do so carefully.

“If you start lowering prices, that can undermine the value proposition that brands and manufacturers have built up over the years with their consumers,” Bailey said. For example, lower prices can make people think that food quality has gone down – or make them think they paid too much in the first place.