how huge food companies like Cargill and Mcdonald’s, etc. protect themselves from extreme price changes.

Question

how huge food companies like Cargill and Mcdonald’s, etc. protect themselves from extreme price changes.

In: 858

Answer 1

Former purchaser for a large CPG (consumer package goods) company with brands most would know. $200m in spend under management.

You’re asking two different questions. Cargill is mostly B2B and and McDonald’s is B2C.

For commodity items with a ticker/index. Costs can be “controlled” by hedging positions with options/futures etc. This is way out of my wheelhouse. And judging by the comments, out of most peoples wheelhouse trying to explain it.

For the items you find in the grocery store, most have ingredients going into them that have contracts in place ranging from quarterly to 2 or 3 years. However most contracts typically have a 1 year pricing structure.

Markets are always fluctuating and there are levers to pull to control costs. Some commodities are falling while others are increasing. You can move suppliers to increase competition and drive prices down.

But in times like covid created, it seemed all markets were going up so you didn’t have the luxury of one market falling to offset the inflation of another ingredient. This is when the general population felt it the most

I can’t speak to the fast food world either but CPG brands do a lot to attempt to control costs and major retailers tend to push back pretty hard on pricing increases. Even in “creative ways” like reducing the serving size. This is all vetted and negotiated, those in sales and marketing for a CPG brand have analytical teams that break down price/pack architecture. Which is just a fancy way of saying cost per unit of measure. And they compare across the competitive landscape. Like a 12pk of coke vs Pepsi vs Dr Pepper. So if one of these guys tries to pass along a price increase to Walmart and cites the reason is the cost of sugar is up, that has to jive with the story the others are selling. Or you simply price yourself out of the market.

There are plenty of nuances to this. I attempted to be as brief as I could be for such a complex topic.