In the past April, many listed food companies released their 2021 annual reports. Setting aside the mixed profit and revenue figures, a common phrase appeared in these reports: "Due to factors such as production output and market supply and demand, the procurement price of XXX in 2021 increased year-on-year..." The price hikes might involve wheat, flour, soybeans, or feed and fertilizer. While the market was still digesting the volatile and severe commodity prices under international tensions, Indonesia made another move on palm oil. Starting April 28, Indonesia, the world's largest palm oil producer, will suspend exports of palm oil series products, including primary products and other derivatives. Intensifying Cost Pressures In fact, China relies almost entirely on imports for palm oil, with heavy dependence on Indonesian palm oil. Meanwhile, China is currently the world's second-largest palm oil importer and third-largest consumer. According to data from China's General Administration of Customs, in the first quarter of this year, China imported 258,300 tons of palm oil from Indonesia, accounting for 52%; and 24.28 tons from Malaysia, accounting for 48%. Palm oil, due to its strong antioxidant properties, can withstand prolonged high temperatures and repeated frying without discoloration. Additionally, palm oil is inexpensive; in normal years, domestic palm oil transaction prices are significantly lower than soybean oil prices during the same period. Therefore, it is widely used in the food industry and chemical industry. In food processing, palm oil is used in instant noodles, puffed snacks, puff pastries, etc., and is the second-largest vegetable oil consumed in China after soybean oil. According to industry insiders, after Indonesia announced the palm oil export ban, prices of soybean oil, rapeseed oil, corn oil, and sunflower oil are also expected to rise. Indonesia is the world's largest palm oil producer, accounting for about 60% of global palm oil production. If the demand previously met by Indonesia now needs to be temporarily replaced by other oils, such as sunflower oil and corn oil, a more awkward fact emerges: the world's largest and second-largest sunflower oil producers and exporters are Ukraine and Russia, respectively. Russia and Ukraine have long been known as the "two European granaries," major global exporters of grains and oilseeds, with wheat, barley, sunflower seeds, and corn exports ranking among the top five globally. The conflict between these two "oil bottles," coupled with a significant increase in demand, will undoubtedly lead to soaring vegetable oil prices. Even if coconut, peanut, sesame, flaxseed, and other woody and herbaceous oilseeds could replace palm oil, these oilseeds inherently cost more than palm oil. The cost issue has become an unsolvable problem. The Food Industry Is Nearing Its Limit Industry insiders believe that the palm oil ban will be difficult to sustain in the long term. First, palm oil exports are a crucial source of Indonesia's export trade revenue, ranking second in Indonesia's total export trade income. Second, Indonesia's domestic industry currently cannot absorb the large surplus of palm oil; Martono, Secretary-General of the Indonesian Palm Oil Association, publicly stated that after a comprehensive export ban, all edible oil storage facilities in Indonesia would be full within a month. However, even if the palm oil ban is lifted in the short term as hoped, it would be a drop in the bucket for the food industry, which is counting every penny. Over the past two years, upstream raw material cost pressures in the food industry have been increasing. Data from the International Food Agency shows that international food prices rose by 28% in 2021, reaching the highest level in nearly a decade. Taking instant noodles as an example, in a bowl of instant noodles, palm oil accounts for 18% of the cost, and flour accounts for 30%. Since the beginning of 2021, the costs of these two raw materials have continued to rise, squeezing the profit margins of instant noodle companies. International food prices were already on an upward trend due to the pandemic, and the conflict between Russia and Ukraine pushed already-high grain prices up another notch. As major grain exporters, Russia and Ukraine together supply 19% of the world's barley, 14% of wheat, and 4% of corn, accounting for more than one-third of global grain exports. Since the conflict began, wheat and corn prices on the Chicago Board of Trade have hit limit-up multiple times. Amid market uncertainty, many countries have adopted trade restrictions banning food exports to protect domestic food supplies, further driving up raw material prices in the food industry. Tight supply, rising wheat, corn, and soybean prices, transmitted to midstream and downstream, cause flour, feed, and edible oil prices to rise, leading to higher meat and dairy prices. Consequently, it is natural that gross margins of end-market products are compressed. When profits decline, companies seek to expand markets, increase revenue, and cut costs. This requires further investment in brand and channel promotion, raising sales costs and intensifying industry competition. With rising costs and performance pressure, companies can only resort to the final measure: price increases. To Raise or Not to Raise? That Is the Question However, many food and catering companies prefer to bear the rising raw material costs alone rather than easily adjust prices for consumers. Because price increases trigger a chain reaction. For consumers, price increases are unwelcome. If companies directly pass on costs to consumers, it may lead to customer loss and negative market sentiment. For example, in the catering industry, the price increase controversies at Haidilao and Xibei in 2020 sparked public debate and repeatedly topped Weibo hot searches. To appease consumers, both companies issued apologies and claimed to revert menu prices to pre-increase levels. In the post-pandemic era, finding new growth points is difficult, and the market has entered a stock era where sales gains and losses are zero-sum. From a business owner's perspective, facing a new wave of price increases, if one can hold off on raising prices, does it mean there is an opportunity to increase market share? In zero-sum competition, if a company rashly raises prices while competitors maintain theirs, it is tantamount to handing over market share. Still using the catering industry as an example, in 2020, when many companies announced price increases, Laoxiangji claimed it would resolutely not raise prices, sparking heated discussion and netizens praising it as "righteous" and "thoughtful." Whether this was opportunistic marketing is not discussed here, but it illustrates: Raising prices is like playing a game in a dark forest. For offline food companies, raising prices involves not only competitors and consumers but also distributors in the distribution mechanism. F2B2b2C, the maintenance of this value chain relies on price differences from layer-by-layer markups. The foundation for such markups is price stability. If distributors don't make money selling a brand's products, or if profits are unstable, distributors will be reluctant to sell the product well. Therefore, when companies face rising raw material prices, how to absorb cost pressures, balance pricing, and manage customer relationships is a profound test of business management capability. Microscopically, the Russia-Ukraine situation remains deadlocked; macroscopically, there is no end in sight for the pandemic. Amid multiple intertwined difficulties, every year could become "the best year of the next decade." The restriction on palm oil imports is just one microcosm of the turbulent global economic situation in recent years. No one knows what tomorrow will look like. It's still dark, and reality seems worse than before nightfall. When the future becomes unclear, people begin to salvage hope from the past. History is the knowledge of understanding today and tomorrow from yesterday. When all companies can no longer bear the significant profit shrinkage due to rising costs, price increases inevitably become a silent structural consensus. The question then becomes: How to raise prices? Looking back, the wisdom of price increases has long been summarized in many professional books and demonstrated. Optimistically speaking, raising prices does not necessarily mean drinking poison to quench thirst for the food industry. In a deeper sense, the stagflation environment forces people to make changes, shifting competition logic from price wars to value wars. After all, consumers ultimately need products that provide value, not just cheap ones.
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