BofA Global Research Senior Food & Beverage Analyst Bryan Spillane joins Yahoo Finance’s Brian Sozzi to discuss the rising cost in food prices as companies manage inflation.

Video Transcript

BRIAN SOZZI: Bryan, good to see you here. Is there any end in sight to this inflation that the packaged food companies are pushing onto shoppers?

- Yeah. You know, it's still inflating. I mean, we had Smucker's report earnings yesterday, and they revised their cost inflation guidance up for the current fiscal year from being at high single digits now to being up low double digits. And the incremental increase, or what's inflating more, are still labor logistics, also specific to Smucker's coffee. Coffee costs are up 80%-- Green Coffee costs are up 80% year over year. And that's starting to filter through, as well.

And, of course, their reaction to that is to pass it on to the consumer. And so, part of what they discussed yesterday is plans for another round of price increases, which the consumers will see in the first calendar quarter of next year.

JULIE HYMAN: Hey, Bryan, it's Julie here. I'm curious, when you look across the spectrum of the companies that you cover, what differentiates those that are able to pass on those costs and are managing it successfully and those that are not? Or is everybody doing it?

BRYAN SPILLANE: Yeah, that's a great-- it's unusual circumstance right now because, generally for that question, the beverage companies typically have more pricing power than the packaged food companies do. Within packaged food, it's typically things that are snacks, so Hershey and confections, Mondelez, Pepsi, and salty snacks, and biscuits.

But when you look at more of the center of the plate, sort of food items, typically, there has not historically been a lot of pricing power. But what's unusual this year is that there has been. Food companies, in particular, began raising prices the middle of the year, and there's virtually been no elasticity.

And we're talking about price increases between 5% and 10%. And I think it's a key question, something that we're really watching as we move into next year is at what point does the consumer begin to push back and do we begin to see some trading down or other behavior that demonstrates that consumers are feeling that pinch?

But, again, historically, its brands convenience typically have been items and function, typically have been the items that have had the most pricing power. And right now, though, it's been a free-for-all. Everybody's raising prices.

BRIAN SOZZI: Bryan, the Gap quarter has me upset and in a bad mood here. So I want to lock in on your underperform ratings here. Why are you at an underperform on Campbell's Soup? It's getting cold, doesn't that mean more soup sales?

BRYAN SPILLANE: Right. Campbell's struggling from a few issues, right? One is they are experiencing material amount of inflation. They have a product portfolio that's a little bit more skewed. Think about condensed soup, it's a little bit more skewed to kind of middle and low income households. So, that's, maybe, an area where there may be some sensitivity around passing those prices through.

They also have a snacks business, which is complicated. And it's got a very complex supply chain logistics. And they have a lot of direct exposure and indirect exposure to labor shortage, labor costs. And from our perspective, there's still some risk to margins at Campbell's as we go through the balance of this fiscal year.

And to Julie's point, I think we're thinking about businesses that have pricing power, relative pricing power, we see Campbell's kind of at the lower end of that, that scale.

BRIAN SOZZI: All right, another under-perform, McCormick. Now, they have really built themselves up via acquisition the past two years. Very formidable presence in spices in the supermarket. Why underperform?

BRYAN SPILLANE: Right. So McCormick has performed pretty well through this pandemic. From our perspective, though, it's still, even though the stock has underperformed or lagged, it's still trading at a premium valuation. We still see input cost inflation in things like packaging resins.

And you've had this very unusual period, right? The last 18 months people have cooked more at home than they have in any period that you can think of. And at some point, as things moderate, you're going to see less of that cooking at home behavior. And that's going to create an overhang for McCormick.

But our starting point is just same thing, you've got a little bit of margin pressure potentially, and also stock trades at still a premium valuation to the group.

JULIE HYMAN: Bryan, I want to go back to something that you said about consumers pushing back against higher prices. And we've heard, really, for months now, people are not pushing back against higher prices. You talked a little bit about what that would look like, right? When it comes to something like clothing, you can just not buy the thing if you think it's too expensive. When it comes to food, it's a little bit different, right? You still have to buy the food. So you mentioned trading down, but how will we know? What are you looking for to show you if that's going to start to happen?

BRYAN SPILLANE: Right. So what we're watching is partly the areas that have inflated the most. So, for instance, if you look at proteins, we're watching carefully to see if you're seeing a trade down in beef from steaks to ground beef, right? If you're seeing a trade between beef and chicken, right? If chicken's less expensive than beef, do people make that trade?

So, we're looking for switching within proteins to get a sense of whether or not that sticker shock is beginning to drive some change in behavior. And that may give us a sense for what happens more broadly, right? Do we see a trade down from premium brands to bid price to private label? Do we see a bigger shift into more value-oriented product categories, like condensed soup or pasta, for instance, where you can feed more people less expensively.

So, it's a lot of switching between that we'll be watching carefully. And, again, given how much protein inflation there is, that's a good spot to begin to watch to see if we're seeing a change in consumer behavior.

BRIAN SOZZI: Bryan, what food company is really going to cash in during this inflationary environment? And by extension, what would that mean to their stock?

BRYAN SPILLANE: Yeah, I think as we look across the food companies, in particular, Hershey is well positioned. They are operating-- the chocolate, confection category in the US is pretty concentrated, so it's historically demonstrated pricing power. It's not a center of the plate type item, so it's convenient, it's not an everyday sort of item. So, it's a little less price sensitivity.

And so, we think the combination of a category that's still growing very strongly where there's still a lot of product innovation and where there's been demonstrated pricing power, we think that Hershey is set up really well to be able to maybe even more than protect margins, maybe potentially grow margins as we cycle through some of this inflation.

BRIAN SOZZI: Hey, Bryan, real quickly before we let you go, is it tough for you to go shopping when you are hearing-- when you cover this so closely with all these inflationary pressures. I mean, how do you do this?

BRYAN SPILLANE: Yeah. You know, I end up spending a lot more time in the store than the average person I think because you really begin to kind of double click, as you will, as you go down the aisles. But, frankly, it also kind of informs-- I'll give you a good example. We would not buy lamb chops now because lamb chops are, like, $30 a pound.

And so, kind of go in with a sort of a mindset of knowing what you're going to avoid because you have a decent sense of what's really inflated versus other items.

BRIAN SOZZI: All right, well, stay strong in those supermarket aisles. Enjoy your Thanksgiving dinner. Bryan Spillane, Senior Food and Beverage Analyst at Bank of America of Global Research. Good to see you.

BRYAN SPILLANE: Good to see you too. Happy Thanksgiving.

BRIAN SOZZI: Thanks so much.