Kellogg prompted to hike prices as worsening inflation push production costs higher

USA— American multinational food manufacturing company Kellogg has been forced to hike prices for its products to help counter the impact of soaring production and transport costs on its profits.

According to Kellogg, costs from freight and ingredients such as wheat, corn and edible oils have surged in the last year due to pandemic-induced disruptions to the global supply chain.

This in addition to cereal shortages stemming from the strike and a plant fire has forced the packaged food industry to raise product prices to cushion the hit to their profit margins.

Russia’s invasion of Ukraine is also expected to hurt supplies in the second half of the year, Kellogg said.

That part of Europe is a major source of ingredients for packaged food companies. One of which is sunflower oil.

The lack of Ukrainian sunflower oil has forced Kellogg to turn to Indonesian palm oil. However, the logistics of this situation are tenuous.

So far, Kellog has not been affected by the Indonesian export ban of palm oil, but only time will tell whether it will escape the ban unscathed or not.

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Regarding shoppers swapping out Kellogg products for cheaper items, CEO Steve Cahillane said “we haven’t seen evidence yet of that but as we look forward – just because inflation is so intense, and because the benefits of stimulus money is so significant – our forecast is it (will) have pressure.”

Kellogg did however recognize that a price hike could affect sales and said it expects demand for some cereals to slow as runaway inflation cuts into purchasing power.

“Ultimately in an environment like this, which we clearly we haven’t seen in 40 years, we aren’t going to be able to just not pass prices through to consumers,” Steve Cahillane said.

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The company revealed its production challenges during the release of results for the period ended April 202 where it reported a profit of US$424m versus US$371m a year earlier thanks to steady sales growth for its snack brands.

The company’s cereal sales in North America however fell by 10.3% in the first quarter due to a near three-month long strike at its plants that make Froot Loops, Corn Flakes and other cereal brands.

Even with the headwinds currently affecting the company’s operations, Kellogg is optimistic and has raised its 2022 organic sales growth forecast to 4% from 3%.

JP Morgan analyst, Ken Goldman opined that there’s been a lot of concern from investors about Kellogg’s ability to maintain its profit guidance.

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