Saturday, July 12, 2014
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Higher food and energy costs pose challenge for manufacturers

Often reluctant to raise prices on their customers, producers may reach a point in 2011 where they must to protect their margins.

Higher food and energy costs pose challenge for manufacturers

The debate over inflation - even at a time when the major economic barometers detect little if any of it - will never abate.

The Bureau of Labor Statistics said Jan. 14 that the Consumer Price Index for December rose 0.5 percent. Economists like to focus on the core index, excluding volatile food and energy, which rose just 0.1 percent.

That exclusion irks a lot of people who call me. Their receipts from the grocery store and gas station tell a different story. Food and energy costs them more now, and they can’t exclude either from their core budgets.

What also confuses some is hearing that manufacturers are “reluctant” to pass on price increases.

But much of the data tends to bear that out. The latest quarterly survey by the National Association for Business Economics indicates that 74 percent of respondents said the prices charged for their finished products were unchanged in the previous three months. Only 16 percent had raised prices during that period, while 10 percent had actually lowered them.

That same survey noted that the costs of materials have risen steadily since January 2009. Still, the level is below highs reached in 2008 - when crude-oil prices touched $147 a barrel in June.

A regional survey of manufacturers by the Federal Reserve Bank of Philadelphia released last week shows that prices paid for raw materials and other items needed for production have risen for the last five months. Price increases for the goods they made have risen for only the last two months.

Price hike

Every company faces a difficult choice when it comes to changing the prices they charge for what they make.

The discussion between financial analysts and J&J Snack Foods Corp. management in a conference call Friday showed the Pennsauken food producer has decided now is the time to raise prices.

J&J Snack Foods told analysts that it grappled with a $21.3 million increase in ingredient and packaging costs during its first quarter ended Dec. 25. The cost of flour alone is up 50 percent from a year ago, said chief executive officer Gerald B. Shreiber.

Expecting its operating margins to be pressured for the rest of the year, J&J Snack Foods said it has begun to raise prices, on average, about 3 percent to 4 percent.

You’re most likely to encounter its products, such as SuperPretzel soft pretzels and Icee frozen drinks, at snack bars in shopping malls, movie theaters, and sports arenas. About two-thirds of J&J Snack Foods’ sales come through food-service providers.

“If this commodity turmoil that we are in continues or gets much worse, we might have to look about doing something again later on in the year,” said Shreiber, referring to price increases.

That comment comes from the head of a firm that reported net income of $7.09 million, or 38 cents a share, on net sales of $155.6 million for its most recent quarter.

But, according to the back-and-forth between analysts and management in previous conference calls, J&J Snack Foods has never been quick to raise prices. On a November call, Shreiber was asked repeatedly about when the firm might increase prices, with analysts’ alluding to how the firm was affected the last time commodity prices spiked in 2008.

“We anticipate we’re going to be in a lot better shape than what we were three years ago … when we were a little bit slow getting out of the gate catching up with pricing,” said Shreiber, according to a transcript.

Analysts also look at the growing stash of cash on its balance sheet and wonder if J&J Snack Foods is planning to acquire another food company. Akshay Jagdale, with KeyBanc Capital Markets, specifically mentioned the debt-burdened Tasty Baking Co., to which Shreiber said, “No comment.”

Analysts may be impatient seeing the $126.1 million in cash and investments that J&J Snack Foods had amassed as of Dec. 25. But the company has been very deliberate in building a strong balance sheet - no debt! - over the years.

J&J Snack Foods did buy two firms in 2010: Parrot Ice, maker of a frozen beverage sold in convenience stores, for $1.2 million in February; and the much bigger California Churros Corp. for $24 million in June.

With Shreiber having parried all questions about possible M&A with boilerplate answers, Morgan Dempsey analyst Brian Rafn tried reverse psychology: “Are there any specific product categories that you would stay away from?”

Shreiber’s answer: “I’m not going to go into the business of slaughtering of animals.”

And shortly after that, the call was over.

Mike Armstrong Inquirer Columnist
About this blog
Mike Armstrong blogs about Philadelphia corporations and business-related topics. Contact him at 215-854-2980. Reach Mike at marmstrong@phillynews.com.

Mike Armstrong Inquirer Columnist
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