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Moving freight to get more expensive for food companies this year

Friday, February 2, 2018   (0 Comments)
Feb 2 (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 Co, Mondelez International, J M Smucker Co and Campbell Soup Co 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.

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. The average diesel fuel price per gallon for most of January was up 44 cents from last year.

Structural labor shortages and higher fuel costs would drive truck rates up 5 to 6 percent in the next year, Howard said.

Freight typically accounts for about 5 percent of costs of goods sold, or roughly 3 percent 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.

Kisses chocolate maker Hershey reported a 1.8 percent fall in adjusted margins, partly hit by freight costs. Oreo-cookies maker Mondelez said margins in the quarter were flat compared with last year with cost of sales rising nearly 3 percent.

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 by Sangameswaran S, additional reporting by Siddharth Cavale in Bengaluru; Editing by Saumyadeb Chakrabarty)

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