When you consider the impact of inflation on the basic items most of us, as consumers, use on a regular basis, it is easier to translate the impact of inflation to the financial performance of a business. A few weeks ago, we looked at the April year over year change in the price of a hamburger. Let’s now consider the impacts of inflation on a typical breakfast.
The cost of making of a breakfast sandwich and having a cup of coffee has changed significantly from May 2021 to May 2022.
Recently Forbes reported that Chipotle has increased its prices 10% since 2020 and McDonald’s increased prices 6% from 2021 to 2022. During McDonald’s Q4 2021 earnings call, the CFO said their increases covered a 4% commodity price increase, as well as labor inflation, coupled with the competitive environment.
In the CPI categories needed for the breakfast sandwich and coffee, biscuits, breakfast sausage, eggs, cheese and coffee, the Bureau of Labor Statistics reported increased costs during the three months from February 2022 to May 2022 to be:
Biscuits – 2.5%
Breakfast Sausage – 4.7%
Eggs – 17.2%
Cheese – 4.2%
Coffee – 4.8%
Often the PPI is considered a leading indicator of additional changes consumers will feel in the future. Looking at similar categories for the breakfast sandwich and coffee in the PPI for final demand the following increases are reported during the three months from February 2022 to May 2022:
Baked goods – 2.2%
Pork – (0.1%)
Eggs for fresh use – 67.4%
Dairy Products – 7.2%
Roasted coffee – 1.5%
Based on these CPI and PPI numbers showing the increase in costs from February to May, there will be increased upward pressure on costs to produce products and services which may translate to additional cost increases for businesses and consumers. Businesses will need to find ways to increase prices, reduce costs, improve profitability, and manage working capital. Based on the Q4 McDonalds earning call and other price increases restaurants have implemented, there will likely be more price increases to come. Businesses have not increased prices at a level that offsets the recent cost increases. Running a business successfully is always a challenge, but today’s environment intensifies the skills and creativity needed.
When thinking ahead to the cost of breakfast in 2023, there are some interesting challenges. Commodity prices continue to be moving dramatically and that is not expected to change. Food producers and processors today are trying to determine what they should do with Q4 2022 contracts for corn, wheat, fertilizer, and fuel. And, the concerns for Q4 are extending into production during 2023.
Corn prices have ranged from $5.88 per bushel on January 13, 2022 to $8.16 per bushel on April 20, 2022 and as of June 20, 2022 the price was $7.85. Should a producer or processor relying on corn as an input lock in a price today for future delivery or wait to see what happens to the markets?
Wheat prices have ranged from $7.42 per bushel on January 14, 2022 to $12.94 per bushel on March 7, 2022 and as of June 20, 2022 the price was $10.34. Should the producer or processor lock in those prices?
Fertilizer prices are tracked by DTN and by World Bank. Fertilizer costs have more than doubled year over year and have finally shown some lower pricing over the past two weeks. Should farmers lock in fertilizer for the 2023 planting season today?
The year over year increase in fuel costs is on the front page and the lead story of almost every business news venue. As of June 21, 2022 AAA reports that diesel is up from $3.225 per gallon one year ago to $5.812, an 80.2% increase. Should a producer or processor lock in fuel and energy prices today?
What should a business do?
The first step in decision making is to evaluate financial performance and cash flow for the remainder of 2022. This will provide an indication of the level of cash and access to liquidity a business may have.
The next step is to identify the estimated volume of various inputs needed during 2023.
Then contracts need to be evaluated to determine which sales and supply contracts have pricing changes built in and determine what sales and production volumes should be expected.
The combination of this information will allow a business to determine the matching of revenue and expenses, and the ability of the liquidity and capital position of the business to absorb performance shocks. Developing multiple alternative performance forecasts will help businesses go through the decision-making process for input planning.
Because the economic environment today is challenging and often threatening to individual businesses, planning and analysis are the keys to success. There is not a perfect answer, but thorough review and analysis helps reduce performance risk. Businesses that focus on these types of analytics and decision-making fundamentals will be the ones that are successful during these difficult times.