Moving freight to get more expensive for food companies

Reuters — U.S. food companies called out rising freight costs as a reason for lower profit margins in the holiday quarter, with more pain seen in 2018 as a dearth of drivers and higher diesel prices make it even more expensive to transport products to stores.

Hershey, Mondelez International, J.M. Smucker and Campbell Soup said higher transportation costs hurt profits during the quarter, preventing them from taking advantage of lower commodity prices.

An increase in truck rates over the next 12 months implies a 15-18 basis point gross margin headwind for U.S. food companies on average, Bernstein analyst Alexia Howard said in a note last week.

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Recruiting and retaining truck drivers has been a lingering problem for U.S. trucking companies as they compete for qualified ones at a time of low unemployment, while striving to keep pay, a huge expense, as low as possible.

Fuel costs are rising too. Diesel prices were 37 cents per gallon higher in September-December 2017 than a year ago (all figures US$). The average diesel fuel price per gallon for most of January was up 44 cents from last year.

Structural labour shortages and higher fuel costs would drive truck rates up five to six per cent in the next year, Howard said.

Freight typically accounts for about five per cent of costs of goods sold, or roughly three per cent of sales on average for food manufacturing companies.

“Looking across the entire food value chain, the margin headwind could be as high as 50-70 basis points for the entire industry,” Howard said.

Chocolate maker Hershey reported a 1.8 per cent fall in adjusted margins, partly hit by freight costs. Oreo maker Mondelez said margins in the quarter were flat compared with last year with cost of sales rising nearly three per cent.

This comes despite prices of key ingredient cocoa falling to a five-month low in December.

Jif peanut butter maker J.M. Smucker and soup maker Campbell warned in November that freight and truck-related issues would hit margins. The companies are yet to report results for the last quarter of the year.

“Demand for overall transportation is exceeding supply in marketplace and this makes a tough situation more difficult,” said Mark Pogharian, Hershey’s vice-president for investor relations.

He added that shippers would have limited flexibility to move shipments based on truck availability and may cause overall market rates to increase further.

— Reporting for Reuters by Sangameswaran S; additional reporting by Siddharth Cavale in Bangalore.

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