For the first time in at least five years, consumers will have to pay more for some of Hershey's signature chocolate bars. But based on recent price increases from various food and beverage companies, shoppers might not mind.
Last month, Hershey CEO Michele Buck announced a 9% price hike on some chocolate and candies that will mostly take effect next year. The move comes after a 2.5% price increase for bagged candies, gum and mints implemented this year.
"Price realization is a strategic focus area for us," Buck said on a call with investors. "These actions reinforce our commitment to a more agile approach to pricing strategy that protects our advantaged margin structure while enabling continued investments in our brands and capabilities to drive category growth."
But Hershey is far from alone in raising prices. More food and beverage companies are using price increases to boost bottom lines as they face higher costs, more competition and changing consumer demands. Last year, several big food companies announced they were increasing prices in 2019. For many, those hikes have been successful.
In April, both Nestlé and Unilever reported sales growth after raising prices on some of their products. And last month, Mondelez saw organic sales rise 2.5% in the U.S. and Canada as the company upped prices.
Ellen Kan, a senior director at Simon-Kucher & Partners who has written about how CPG companies can orchestrate price increases, told Food Dive many CPG companies started to announce the implementation of price increases last year as a result of cost increases for commodities and rising freight costs.
This year, the financial impact of those price hikes could influence other companies to consider increases, she said.
"I do think we're actually already beginning to see a lot of it pay off, and you might see a second wave of companies follow as they see some of these results coming into the market as well," Kan said.
Nielsen's Vice President of Strategic and Sales Enablement Paul Morgan told Food Dive in an email prices during the past two years have seen "more pronounced increases across the board."
U.S. food prices increased 2.4% during the 52 weeks ending July 20, compared to 1.4% the previous year, according to Nielsen. The frozen and deli departments featured similar price increases, with 1.9% and 1.5% price hikes during this timeframe, respectively. This is compared to 1.7% and 1% price increases during the year before.
"Part of the goal of the price increase is to generate more profit, not just to keep in your pocket, but to reinvest back in the business. It's so competitive these days for consumer share that if you're not spending on being relevant to them — whether that's in terms of bringing on new products or in your messaging and how you're reaching them — then it is really hard to win in the marketplace."
Ellen Kan
Senior director, Simon-Kucher & Partners
In order to have successful price increases, analysts told Food Dive companies have to reinvest money into their brands, working on innovation and quality so consumers understand why they are paying more.
"Today’s consumers are much more informed and empowered than they used to be, thanks to technology and social media, so they can quickly evaluate the products they buy. And they are prepared to pay a premium depending on the circumstance, e.g. certain product claims, so brands should understand how consumers perceive their products, to inform their pricing strategy," Morgan wrote.
When it comes to timing these price increases, Kan said companies should have the hikes hit the market at the same time as marketing and innovation — things they do to excite consumers about the products.
"Part of the goal of the price increase is to generate more profit, not just to keep in your pocket, but to reinvest back in the business," Kan said. "It's so competitive these days for consumer share that if you're not spending on being relevant to them — whether that's in terms of bringing on new products or in your messaging and how you're reaching them — then it is really hard to win in the marketplace."
Andrew Csicsila, managing director at AlixPartners, told Food Dive companies that have a combination of great brand equity, marketing strategies and consumer insights can implement successful price increases. But he said it is important to collaborate with the marketing and sales teams to differentiate the product from what has already been on the shelves for years.
"Now we're not saying you go out there and do a 20% to 25% increase in price, but subtle price increases year over year are what companies are doing," he said. "Those that are able to make the big jump in price increases do it because they've done several things of convincing, telling the story about the product to the consumer so that they don't feel the overall increase."
Beverage companies have used similar tactics and seen positive results. In AB InBev's most recent earnings report, its U.S. revenue grew 1.8% driven by premiumization of its portfolio and its new initiatives, including a price increase in April. Coca-Cola's most recent quarterly earnings were boosted 2% in North America by higher prices and packaging initiatives.
Csicsila said many companies are doing a combination of increasing prices while also continuing to cut costs on a lot of their products. But, he said, cost-cutting doesn't mean companies are degrading the quality of the product. It can mean they are being more innovative.
"Whether or not that is in new formulations, whether or not that is in new packaging, they are reinvesting in the brand, which is allowing them to put a premium price on the shelf, and consumers are responding to that," he said. "If I have a product out there that I can argue has proprietary process, that has been very innovative in going to market, it is a lot easier to convince consumers that I am able to raise prices on the product."
