Albertsons warns of ‘difficult conversations’ with CPG brands if inflation-related price hikes go too high

By Elizabeth Crawford contact

- Last updated on GMT

Source: Getty/ klenger
Source: Getty/ klenger

Related tags: Albertsons, Inflation, Price, Retailers

Recognizing that risings costs are squeezing food and beverage margins as the pandemic continues, Albertsons will accept – to an extent – price increases that several large CPG players have warned in recent weeks are coming down the pike.

However, if price increases threaten to outpace the current heightened demand for food at home compared to before the coronavirus outbreak, “we’re going to have difficult conversations on how much we can accept,”​ Albertsons’ CEO Vivek Sankaran warned during the retailer’s fourth quarter earnings call April 26.

His caution comes after several major CPG manufacturers, including Nestle​, The Coca-Cola Co​., PepsiCo and others announced earlier this month that they may raise prices on products if commodity and other input costs continue to climb due to the pandemic beyond where they are hedged. Many large players have longer-term contracts and sufficient supply to hold off on increases for now, but those stockpiles will likely run out for most in late 2021 or early 2022.

While the companies did not indicate which products would be impacted and by how much, any increases could have broad implications for consumers and retailers.

Within this context, Sankaran said during the retailer’s fourth quarter earnings call April 26 that while he believes consumers can absorb some increases, he will not pass through full increases that surpass current at home food inflation.

The retailer currently is tracking food at home inflation at 3-4% higher than before the pandemic, according to Sankaran, who said he believes that most consumers can and will pay prices in line with that.

“The demand is still ahead of supply in so many categories,”​ and “by and large the consumer is healthy – they have got cash,”​ so if price increases reflect “demand-driven inflation, you are going to see consumers still shopping these categories.”

If, however, prices exceed that 3-4%, “we are not going to pass through all of it and we are going to have difficult conversations up and down the supply chain,”​ he cautioned.

Where will inflation land?

While this may sound like a hardline approach, Albertsons already could take a hit if it passes through price increases in line with the 3-4% range and that exceeds consumer demand given it is operating with a more conservative  assumption that inflation will level out at around 1-2% for the full year.

On the flip side, if inflation remains above Albertsons’ baseline planning of 1-2%, the retailer could see a positive impact on its bottom line or use the difference to drive top line growth, added CFO Bob Dimond.

There also may be a bit of wiggle room in working with the retailer if CPG companies can provide sufficient warning.

“A lot of this inflation that you are hearing about from CPGs and others”​ is still out on the horizon, and “the nice thing about when it is planned and … when you have some sense for how it might shape up, it’s more manageable,”​ Sankaran explained.

“The ones we worry about are the spikes, and we are not seeing any of those emerging at this time,”​ he added.

Consumer commitment leads to record year

Albertsons’ focus on inflation and pricing reflects the retailers “unwavering commitment to take care of our customers,”​ which has deepened during the pandemic, according to Sankaran.

He explained that throughout the past year, the retailer has differentiated its offerings, expanded its assortment, and built out omnichannel capabilities “that allow customers to conduct their shopping with us any way they want.”

As a result of these and other measures, Albertsons reported a strong fourth quarter with sales up 11.8%  and record results for the year with sales up 16.9% and an adjusted earnings per share of $3.24 – up 212% from the prior period. Revenue climbed 2.1% to $15.7b and same-store sales rose 11.8% for the year.

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