WCMA Notes: Grocery Store Sticker Shock to Change Little in Dairy Aisle, Industry

Sticker shock, once reserved for hospital bills or a visit to the appliance showroom, is now hitting American consumers in their neighborhood grocery stores.  Retail food prices are up about 13 percent in the past 12 months, the biggest jump in the Consumer Price Index in that category in more than four decades.

The trend is true in the dairy department, too, with milk up more than 15 percent, cheese up 12.6 percent, and butter up more than 22 percent year-over-year.

“Our products are selling at higher prices, but our inputs are all up, too,” notes Tim Omer, President and Managing Director of Wisconsin-based Emmi Roth USA.  “Wages have jumped extraordinarily, maybe 40 percent from three years ago.”

Paul Scharfman, President of Specialty Cheese Company in Wisconsin, identified milk as the biggest factor in his increased operational costs over the past year, but also notes, “The ripple effect of higher petroleum costs, in transportation and in packaging, is significant.”

“Inflation has impacted our business, like it has everyone, in direct material, transportation, and labor costs.  We look to efficiency gains in our operations while facing inflationary pressures,” says Kyle Jensen, Vice President of Global Sales and Marketing for Hilmar Cheese Company, headquartered in California.  “We must remain market competitive.”

Pass-through food production costs may be triggering a recent drop in sales at superpremium grocers, as shoppers seek greater value with traditional retailers like Walmart and Kroger, or discount grocers like Aldi and Dollar General.  And that’s not the only impact in the marketplace.  Dairy processors note increased consumer interest in private-label, versus name-brand, products.

Omer believes consumers may also be favoring smaller cheese pieces – if they can find them – when picking from the specialty section, though Scharfman predicts “shrinkflation” – the practice of selling a smaller amount of product for the same price – will be limited within the dairy industry.

“Disruptions in the packaging supply chain make it a headache. Downsizing a product right now is a less attractive option,” Scharfman notes.  “We are still recovering from a pandemic, and people are far more concerned with product being on the shelf, than its price.”

Similarly, industry leaders expect few changes in their marketing and pricing strategies in the months ahead.

“Every consumer has a different value proposition – quality, price, experience.  We’ve always focused more on quality and experience,” says Omer, who notes that Emmi Roth USA’s current social media marketing campaigns position their product line of value-added cheeses, like gruyere and feta, as exceptional ingredients for everyday enjoyment.

Scharfman adds, “People who have money likely have more than they’ve ever had before, so they won’t think twice about reaching for that brie to treat themselves with at home,” noting that while overall American savings have recently dipped, they remain up more than $2 trillion from pre-pandemic numbers.  “On the other end of the spectrum, people living with limited means find good value in a block of cheddar.”

That reality has dairy manufacturers remaining bullish, even as they acknowledge market fluctuations – and increasing costs – will continue.

“Commodity markets may retreat some over time, but not to 2019 levels,” says Jensen.  “The world has changed exponentially, and we must think creatively, in new ways to continue to grow our share of the consumer dollar.”

“The days of $17 milk are in the rear view, and I expect, from this point forward, milk prices will bounce in the $20 range,” notes Scharfman. “Labor costs are certainly here to stay, especially in rural communities where the workforce shortage is felt even more acutely.”

These industry leaders agree that food prices will follow suit, and continue to rise into 2023, but predict continued growth for their companies, as well – a feeling illustrated, perhaps, by their expansion projects, and many others cropping up coast-to-coast.

“I’ve seen three or four recessions in my time in this business,” says Omer.  “Cheese – particularly specialty cheese – tends to weather well.  Consumers have already felt the shock, and they’re still buying.”