Commodity inflation and the impact on the food and beverage industry

Sam Miles Date published: May 22, 24

In our recently released 2024 Food industry audit report, the number one area of concern and risk was commodity inflation, mentioned by 75% of businesses. It was a top five risk both in the 2023 report and in the 2018 edition. Clearly, commodity inflation is an ever present within the food and beverage industry, but it’s one we’ve seen increasingly in the mainstream media in the last year as retailers and manufacturers battle with the increasing cost of ingredients and the rising cost of energy.

How can food and beverage manufacturers navigate the turbulent waters of reputation management when they, in response to commodity inflation, raise the prices of their products or instead downsize their items?

Record profit for retailers has been a frequent news point in the last year. On April 10, 2024, the UK’s largest supermarket chain, Tesco, revealed that its pre-tax profits had risen to £2.3bn, the highest in more than a decade. Tesco’s chief executive, Ken Murphy, stated: “Inflationary pressures have lessened substantially, however, we are conscious that things are still difficult for many customers, so we have worked hard to reduce prices.”

Grocery prices are up nearly 30% since 2019, according to Forbes, with Kraft Heinz profits jumping from $225 million to $887 million in 2022-2023 and Hershey’s seeing a 62% increase in profits in 2021. It’s not just retailers that are seeing the benefits of increased prices, but brands and manufacturers as well. These profit jumps have prompted such scrutiny that in March 2024, the U.S. Federal Trade Commission (FTC) recommended that Congress look further into profits at grocery store operators.

It’s a difficult situation for retailers and manufacturers to manage. Commodity inflation naturally increases the cost of ingredients and this is reflected in price rises, and therefore the cost of the weekly food shop expanding. At the same time, retailers exist to make a profit but battling that image of ‘greedflation’ becomes a very difficult challenge.

The cost-of-living crisis has not exclusively been reserved for food. Price increases across the board from plane tickets, gas and electric and secondhand cars, to name just a few, have all contributed to people being more conservative with their budget. Ultimately consumers are choosing to stay home more often, to work from home, and therefore their usage is far higher than it might have been pre-pandemic.

2024 Food industry audit report

Click here to access the 2024 Food industry audit report in full and discover the top 10 risks to food and beverage manufacturers and retailers.

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What is commodity inflation?

Commodity inflation refers to the increase in price of raw materials, including energy resources like oil and gas, metals like copper and aluminum and agricultural products like grains and oilseed. Geopolitical events like the conflicts in Ukraine and Gaza, as well as other economic conditions caused by the fallout of the COVID-19 pandemic and Brexit, have combined to create a significant rise in commodity prices, which has stuck around for longer than expected.

As the world moved out of lockdown, it moved into long-lasting conflicts. Major supply chain disruption started with COVID-19 and never truly went away. As per the theme of the 2024 Food industry audit report, it is back to business as unusual.

How do food and beverage manufacturers mitigate the fallout of commodity inflation

While inflation generally might be showing signs of easing, albeit very slowly, these last few years have demonstrated that there is no such thing as stability. You will never have a supply chain that is without disruption and you can never avoid fluctuating prices on all of your raw materials.

Not every supply chain risk can be avoided, but what you can put in place is key quality management principles to ensure you are prepared for every potential outcome. Here are the key factors: 

Supply chain resilience

Disruption within your supply chain in this unpredictable age is sometimes unavoidable and so supply chain resilience is the key quality concept that helps you build that solid foundation to avoid supply chain or commodity inflation related disasters. Supply chain resilience is about developing a strategic and proactive approach to identifying and mitigating risks while reinforcing your quality systems in order to withstand and recover from disruptions when they happen. Here are the key factors that are vital to building supply chain resilience:

Risk management

As part of your quality management processes, you should be conducting comprehensive risk assessments of your suppliers, identifying potential threats and vulnerabilities. Develop a risk management plan that outlines your strategies to mitigate identified risks, including contingency plans and alternative sourcing options. 

Supplier management

Building strong and transparent relationships with your suppliers is key to ensuring resilience. You want to easily facilitate open collaboration and information sharing, so that risks are uncovered early. Where possible, you’ll want to diversify your supplier base so that you aren’t relying on single suppliers or specific regions. Monitoring supplier compliance is also important when it comes to the quality and safety of ingredients or raw materials that they might be providing. 

Customer complaints management

If price rises or product downsizing is unavoidable, your organization can come under intense scrutiny from end consumers. An unfortunate result of that can be increased complaints. Having an effective management system in place is vital in ensuring that each complaint is effectively and efficiently dealt with as part of any robust risk management strategy. A digital tool like Ideagen Quality Management Food and Beverage, with its complaint management functionality, allows you to create a formal complaint handling process that can help you quickly implement corrective actions and win over customers. This way, you can turn them from detractors to supporters.

Automated workflows, severity levels with escalations built in and the functionality to investigate root causes and implement preventative and corrective actions ensures you have a consistent approach to complaints, where nothing is missed. All complaints are followed up and lessons are learned, continuous improvement is facilitated and your brand is as protected as it can be.

Your digital backbone

Ideagen Quality Management Food and Beverage is a digital quality and food safety solution that will act as your backbone in building supply chain resilience and combating the fallout of commodity inflation. The solution provides you with robust tracking and traceability functionality, giving you complete confidence in the compliance and strength of your supply chain.

Find out more about Ideagen Quality Management Food and Beverage

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