Big Food Boasts Pricing Power While Gouging Consumers

Consumers continue to face skyrocketing prices at the grocery store even as food companies boast about ballooning profits. And while CEOs claim to be merely passing on increased costs, an explosion of dividends and buybacks within Big Food companies suggests otherwise. As “Greedflation” keeps sweeping the nation, consumers appear to have accepted their plight with little pushback beyond grumbled complaints. Such passivity — perhaps fueled by an acceptance of market factors as the sole cause — may be emboldening runaway price gouging. However, buyers have little recourse when it comes to necessities like food.

Sysco is a prime example of how Big Food took advantage of rising supply costs as an opportunity to increase profits. The restaurant and commercial food distributor passed a 13.4 percent increase onto its clients and yet came out ahead to the tune of a 159 percent increase in annual earnings. Kevin Hourican, the company’s CEO, is quoted in Restaurant Business as describing how raising prices on customers while increasing profit was an “efficient pass-through of inflation”.

Likewise, in a news release the company’s CFO, Aaron Alt, described how profitability had increased in spite of inflation — “strengthening our balance sheet and returning $1.5 billion to our shareholders.”  To put that in perspective, Sysco’s net capital expenditures for the year were less than half of that amount at just over $600 million. Of the $1.5 billion in shareholder giveaways, $500 million went towards stock buybacks while the remainder was distributed as dividends. Furthermore, Alt expects the 2023 fiscal year to bring an increase in earnings per share of 25 to 35 percent — all while no doubt continuing to pass on any cost increases. 

At 12.2 percent, food prices (as in food bought to prepare and consume at home) rose at a higher rate than the average increase across all items, which was 9.1 percent over the course of the fiscal year ending in June 2022. But according to the Bureau of Labor Statistics (BLS), “food away from home” prices (as in restaurants and food service) rose at a slower rate, only 7.7 percent — suggesting that while there might not have been pushback when the largest food wholesaler in the country passed on double-digit increases, restaurants and institutions were likely absorbing much of it in the form of losses. Long-term, this trend could affect the landscape of the restaurant industry as chain restaurants are better equipped to withstand such pressures. Meanwhile, many mom and pops that barely made it through the worst of the pandemic are struggling to keep their doors open. 

Sticker shock at the checkout counter has many families feeling the same pressure. Kraft Heinz — the maker of numerous American kitchen staples such as Philadelphia cream cheese, Oscar Meyer and Miracle Whip — has raised prices by 13.9 percent since 2019. The Kellogg Company has also been raising prices since the middle of 2020. Like Sysco, both food conglomerates blame inflation for cost increases while watching their net revenue rise. Kraft Heinz saw its net income increase by over 1,000 percent for the second quarter of 2022 while simultaneously paying out $980 million in dividends to shareholders in just the first half of the year. Likewise, The Kellogg Company paid out $394 million in dividends and bought back $300 million worth of stock during those same six months.

The Wall Street Journal credited Kraft Heinz's CEO Miguel Patricio with explaining that the lack of consumer pushback is the result of how universal price hikes have been. Leadership from Starbucks and Chipotle were a bit bolder, as they referred to their companies’ pricing power. Starbucks handed out $1.7 billion in dividends and bought back $4 billion in stocks over the first nine months of the 2022 fiscal year — last October, its previous CEO announced it would spend $20 billion in stock buybacks and dividends over a three-year period, though interim CEO Howard Schultz rolled back that commitment on his first day back at the company. Chipotle recently bought back over $260 million in shares after experiencing a double-digit increase in revenue in the second quarter. The fast-casual restaurant chain still plans to buy back an additional $300 million worth of stock — and customers can expect higher prices.

The insatiable appetite Big Food companies have for profits isn’t only threatening families and small businesses. Regarding runaway prices, Morgan Stanley recently warned, “In addition to taking a bite out of discretionary spending, increasing food costs have pushed inflation higher and pose a serious risk to global economic recovery.” (Though the investment bank doesn’t appear to recognize the effect of increasing profit via “pass-through inflation” and instead, only blames market factors.) There is good news, however: Researchers with the firm are hopeful that food prices will begin to drop at the start of next year. 

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