The weather in Florida is balmy now, but the damage done by this winter's freeze will have a lasting impact on PepsiCo's (PEP) orange juice products.
Tropicana Pure Premium orange juice will now be sold in 59-ounce containers, instead of the current 64-ounce size. The gallon-size Pure Premium cartons will stay the same, but prices will be 5% to 8% higher.
In a statement, Pepsi said that after having "fully reviewed the extraordinary losses" of the citrus industry, the company found it was "the most devastating winter freeze and the smallest crop in 20 years. As a result of those freeze-related costs and supply limitations, Tropicana, the biggest buyer of Florida fruit and juice, is announcing some pricing and packaging moves that we hope will minimize the impact to the consumer."
"Better Shape Than We First Thought"
The U.S. Department of Agriculture noted Wednesday that the 2010 orange crop would be about 131 million 90-pound boxes, 19% below last year but, according to The New York Times, the eight days below freezing in January resulted in less damage than growers originally anticipated. In fact, industry representatives were quite upbeat, saying the citrus community is "in better shape than we first thought" and proudly noting growers' "resiliency."
In other words, Pepsi and Tropicana have known how bad this crop would be for a while, but the company is only now responding to the weather of two months ago with an assortment of price increases and package shrinkages -- juggling with its product mix and also its credibility. What with 14-ounce ice cream "pints" and 1.5-quart "half gallon" containers in the nearby frozen food aisle and the ever-lighter breakfast cereal box, customers have either become inured to the Alice-in-Wonderland behavior of the food companies, or cynical and jaded.
A few customers who commented in various social media threatened to stop buying Tropicana products, thanks to the perceived opportunism of Pepsi's price increases. Further, the price hikes will be permanent, even though the aberrant weather is unlikely to return (and, one would imagine, has long since been factored into the company's bottom line: Citrus futures don't trade on commodities boards for nothing). One commenter to The Wall Street Journal says, "Time for me to abandon Tropicana and consume Florida Natural." On Twitter, another customers says she's switching to Minute Maid, which is owned by Coca-Cola (KO) .
OJ Isn't a Necessity
The economics of commodities may not work the way Pepsi is suggesting, but consumers are generally far more willing to accept a price increase if it comes by way of smaller packaging (as long as the register receipt looks the same) than actual price increases. Tropicana's unusual decision to both increase the gallon's price and decrease the half (ish) gallon's package may be an attempt to move more customers to the smaller size, where, as is typical in the industry, the price per ounce is already higher.
Whether customers will swallow one more corporate justification for grocery price inflation is another question altogether. Orange juice, while delicious, doesn't need to be a dietary staple, making it easier to avoid for customers who make buying decisions on principle.
Introduction to Preferred Shares
Learn the difference between preferred and common shares.View Course »