Kraft Heinz Seeks 60-Day Notice for Tariff Price Hikes

Kraft Heinz Co. (KHC.US) has requested its coffee bean suppliers to notify the company 60 days in advance of any tariff-related price increases. This move comes as a result of the tariffs imposed by U.S. President Trump, which have significantly impacted the company's operations and supply chain. The request underscores the challenges faced by American companies in navigating the unpredictable and punitive trade policies implemented by the Trump administration.

The company's directive, issued in April, stipulates that suppliers can only increase prices if the tariffs are permanent. If the tariffs are lifted, the price increases must be immediately reversed. This condition highlights the difficulties American companies face in mitigating the effects of Trump's trade policies, which have been characterized by their volatility and punitive nature.

The Green Coffee Association's contract, which covers a significant portion of coffee imports to the U.S., states that the cost of tariffs imposed at the destination market "should be borne by the buyer." This contractual obligation further complicates the situation for companies like Kraft Heinz, which are already grappling with the financial burden of tariffs.

A European coffee trader, who supplies coffee beans to the U.S., noted that there is no panic among traders regarding the tariffs, as the rules are clear. However, the trader also acknowledged the challenges posed by the tariffs, which have added an additional layer of complexity to the supply chain.

Kraft Heinz has also expressed its desire for suppliers to collaborate with the company to "mitigate" the impact of tariffs. The U.S. recently imposed a 10% tariff on all imported goods, including coffee, and is currently negotiating separate trade agreements with various countries. This move by Kraft Heinz is an attempt to manage the financial impact of these tariffs on its operations.

Kraft Heinz's iconic brands, such as Lunchables, Kraft Macaroni and Cheese, and Oscar Mayer, are facing stiff competition from private-label brands and startups. The company's sales and volumes have declined significantly in the quarter ending March 29, leading to a downward revision of its sales and profit expectations for the remainder of the year.

Coffee has not faced U.S. tariffs since colonial times, and roasters and suppliers are now struggling to adapt to these new tariffs. Kraft Heinz's coffee business generated net sales of $835 million in the fiscal year ending December 28, 2018, accounting for approximately 3% of its total net sales of $25.8 billion. The company has been using the cash flow from its coffee sales to invest in slower-growing brands.

The increase in coffee prices could potentially harm Kraft Heinz's budget-friendly Maxwell House brand. The company has raised its expectation for cost inflation this year from 3% to 5%, but the increase in coffee costs is expected to be much higher due to adverse weather conditions and crop failures, which have caused the price of green beans to nearly double in the past year.

Industry insiders have revealed that Kraft Heinz and other roasters had agreed on coffee bean prices several months ago, when they signed contracts with suppliers to purchase green beans from tropical regions. This agreement further complicates the situation, as the company is now faced with the prospect of absorbing the increased costs of coffee beans, which have risen significantly due to the tariffs.