Skyrocketing global food prices are about to hit home.
George Weston Ltd., the baked goods giant, will raise prices by an average of 5 per cent starting April 1, as it grapples with mounting costs due to soaring prices of commodities such as wheat, sugar and oil. More price increases could be in the offing later this year if commodity costs continue to climb.
"It is a difficult market and we have lots of justification for these increases as the world knows, watching the commodity markets," W. Galen Weston, chairman and president of George Weston, said Thursday. "But it is a difficult, competitive market and you know we will go step by step."
Retailers are expected to pass on at least some of the wholesale increase to consumers. Metro Inc., the No. 3 grocer in Canada, has already said it is jacking up prices of bread, pasta, rice, coffee and oil. Loblaw Cos. Ltd., the country's largest food merchant and controlled by Weston, has hinted it will take similar steps to maintain profit margins. Sobeys, the second-largest player in the industry, has also suggested it would follow rivals and pass through price gains.
Rising food prices are a major global concern, driving widespread protests including those that led to the overthrow of leaders in Tunisia and Egypt and sparked further unrest in the Middle East and North Africa.
Worldwide food prices hit their second straight record high in February, the United Nations reported Thursday. Rising demand from fast-growing nations, along with supply disruptions due to flooding and other natural disasters, have pushed up prices for wheat, rice, dairy, oils, meat and other food products.
But the effect of escalating commodity prices has yet to trickle down to Canada's grocers to any great extent. That is likely to change.
The country's food inflation is on its way to reaching between 5 and 7 per cent later this year, predicted Douglas Porter, deputy chief economist at BMO Nesbitt Burns Inc. That compares with a modest 1.9-per-cent rise in grocery prices for the 12 months ended in January. Based on past patterns, grocery price advances lag surges in commodity prices by about one year, he said. That would point to an acceleration of food prices later this year. "Where there's smoke there's fire."
With Weston raising its prices, Loblaw will probably follow suit, he said. "One would suspect that they will pass on a fair bit of that. There will be a lot of resistance at the consumer level. That's an incredibly competitive market. … It's not going to be easy passing on these price increases. Consumers are still relatively income constrained."
Loblaw spokeswoman Julija Hunter said in an e-mail on Thursday: "We price our products and services competitively and we consider a number of factors when making pricing decisions."
Last week, Loblaw president Allan Leighton said it has experienced "a bit" of inflation in meat, fruits and vegetables, but not in other aisles. "I'm not counting on a lot of inflation in the first six months," he said. "I think people will proceed cautiously. And certainly, we're only interested in passing prices through where there's a cost behind them."
He said he wasn't interested in falling into a cycle of hiking prices only to "promote it all back" by heavy discounting.
Bill McEwan, chief executive officer at Sobeys, which is owned by Empire Co., has also hinted that it may pass on price increases to consumers if it can remain competitive.
"We are seeing signs of balanced inflation starting in which retail prices rise in step with manufacturer prices and the general cost of doing business," Mr. McEwan told a CIBC World Markets conference last week. "There appears to be an appetite for that to happen but we shall see. If we behave like a mature industry, it will happen. If we continue to pursue business that is not there, we will see continued deflation."
At Weston, commodity price gains will cost the company $65-million this year, said Ralph Robinson, president of the Weston Foods division. In January alone, it felt a $20-million pinch. The tab on such essentials as wheat, sugar and vegetable oil and transportation has grown from 35 to 50 per cent in the past year or so. To help cushion the blow, the company is raising its bread, cookie and cake prices, starting April 1, by an average of 5 per cent, Mr. Robinson said.
"We would expect to recover these commodity cost increases in the back three quarters of the year, hopefully," he said on a conference call. "I think it's fair to say that if commodity costs remain at these levels, we would be looking for some more pricing [increases]in the back end of the year."
George Weston's fourth-quarter profit rose 23 per cent to $101-million, or 70 cents a share, from $82-million, or 52 cents, a year earlier. Excluding foreign exchange losses and other items, the company's profit per share was 80 cents, down from 89 cents the previous year. Sales fell 1.6 per cent to $7.4-billion, although sales at Weston Foods rose following the purchase of U.S. Keystone Bakery Holdings and Toronto-based Ace Bakery.