The food industry is being squeezed from all sides. Last year prices for milk, eggs, corn, wheat, oils and almost all other edible commodities climbed to unprecedented levels. They are still rising, although at a slower pace. The prices of electricity and fuel are also on the increase, which makes processing and distribution more expensive. And passing on higher costs is not easy when customers too are feeling the pinch, as unemployment rises, the value of their homes falls, and inflation erodes their purchasing power.
Far-sighted and nimble sourcing, needless to say, has become more important than ever. For instance, Nestlé, which uses lots of milk making baby formula and chocolate bars, buys it under contract directly from farmers, rather than on the open market, where prices jumped by as much as 50 percent last year. It has also changed the recipe of some of its goodies to reduce their milk content.
But even clever purchasing is not enough.
Source: The Economist, http://www.economist.com