Lamb Weston grapples with higher freight, labor and commodity costs

Dive Brief:

• Lamb Weston increased the freight rates it charges customers for product delivery, as the maker of frozen potato products grappled with rising transportation costs that included an increased reliance on trucking, executives said on the company’s Q1 earnings call.
• Senior Vice President and CFO Bernadette Madarieta said the company is hiking rates to “recover the cost of product delivery” and adjusting them more frequently to better reflect market rate changes. It’s also “significantly restricting the use of higher cost spot rate trucking” after relying on it more than usual in 2021.
• Other pieces of Lamb Weston’s supply chain beyond transportation ate away at profits in Q1, including higher costs for manufacturing labor and key commodity inputs such as edible oils. Madarieta said the company expects double-digit inflation for transportation, edible oils and packaging to continue through the fiscal year.

Dive Insight:

Lamb Weston is one of many food companies passing costs on to its consumers to minimize the impact supply chain challenges have on the bottom line.

Nestlé’s strategy “is to offset anything we receive through pricing” as it expects inflation to continue, CFO François-Xavier Roger told Reuters in September. Other companies have made similar statements throughout the year: Tyson increased prices to cover higher grain, labor and freight costs in Q3; and Unilever executives flagged rising input costs during Q2.

“We have been and will continue to pull all of the levers of pricing and saving,” Unilever CFO Graeme Pitkethly said on an earnings call in July. “We’ve already taken significant pricing action in key markets through a combination of list price increases, pack changes on key price point packs, mixed actions and focused promotional management.”

For Lamb Weston, inflation in transportation and commodity inputs accounted for three quarters of its cost-per-pound increase, Madarieta said. The company also saw higher transport costs “due to an unfavorable mix of higher cost trucking versus rail as we took extraordinary steps to deliver products to our customers.”

Companies are spending more to move their goods via truck this year, with limited capacity forcing shippers to put more freight into the pricier spot market. In September, van spot rates were up 19% YoY and reefer spot rates were up nearly 26% YoY, according to DAT.

Lamb Weston, looking to keep the flow of goods on schedule, leaned more on trucks this past quarter. Former CFO Robert McNutt said in April that changes in production schedules required a more flexible transportation option, despite the higher cost. Other shippers have relied more on intermodal transport to avoid elevated trucking rates, though rail networks are also congested.

Madarieta said the results of Lamb Weston’s pricing adjustments lag behind the higher freight costs, so the company expects “to see more of a benefit beginning in the second quarter.” Executives didn’t specify how much freight rates for customers would change.