CSCMP's Supply Chain Quarterly
August 17, 2019

Commentary: Fritos, aluminum, and unintended consequences

While companies continue to focus their attention on blockchain and the Amazon effect, Trump's tariffs stand to pose a real threat to global supply chains.

There are shouts, and there are whispers. The shouts are what get our attention. But the whispers are often equally worthy of note. It's through whispers that critical nuggets of information are frequently exchanged.

Take the recent round of conferences and trade shows, for example. This year, the shouting was all about two topics: blockchain and Amazon. In keynotes and breakout sessions, those subjects dominated the discussion—which is hardly a surprise given their potential to transform the practice of supply chain management.

But there were whispers as well—whispers about a development that has the potential to rock your supply chain world and to do it in ways you might never expect. The subject? Tariffs. Specifically, the tariffs the government has slapped on millions of dollars' worth of imported goods as part of an escalating trade war with China and other trade partners. While the war's outcome is still to be determined, the effects of those tariffs are already rippling through global supply chains.

For instance, consider the headline above: Fritos, aluminum, and unintended consequences. Those don't seem like dots that could easily be connected, but they are.

Here's the deal, much of which was recently reported in a podcast from NPR:

The price of corn is in a slight decline, yet the price of Fritos, the venerable corn-based snack food, is on the rise. A spot check of local vending machines confirms the price recently jumped 20 percent—to US$1.50 from US$1.25 per bag.

An experienced supply chain professional would look immediately to what's happening on the logistics end. We all know that the price of processed foods has more to do with labor, real estate, and transportation expenses than with the cost of the raw materials—in this case, corn. And indeed, all those cost components are on the rise. Yet they don't tally up to anything close to 25 cents per bag of Fritos. So, what's going on here?

Well, for one thing, there's the matter of corporate parenthood. Fritos are produced by Frito-Lay. Frito-Lay is a subsidiary of PepsiCo.

PepsiCo happens to be one of the world's largest consumers of a raw material called aluminum.

Aluminum is one of the commodities caught in the crosshairs in the ongoing trade war. In late May, President Trump slapped a 10-percent tariff on aluminum imports, ostensibly to protect aluminum manufacturing jobs. While the effect on the job market remains to be seen, this much is already clear: Big consumers of aluminum—like producers of energy drinks, beer, and soda—stand to take a painful price hit.

Still, if PepsiCo is adjusting its prices in anticipation of a spike in the cost of aluminum, why doesn't it raise the price of a can of cola rather than a bag of corn chips? The short answer is, it can't. Or to be precise, it probably doesn't feel it's in a position to do so. It seems Americans' appetite for sugary soft drinks is declining, while the consumption of savory snack foods, like Fritos, is rising. In the face of flagging demand for soda, PepsiCo may well be reluctant to raise the price of a can of Mountain Dew or Pepsi. However, it appears confident the market will accept a 20-percent increase in the price of a bag of corn chips.

So, amid all the shouting about topics like blockchain and Amazon, keep an ear out for whispers about tariffs and trade wars. As the now-connected dots between Fritos and aluminum demonstrate, they can indeed have unintended consequences.

Mitch Mac Donald is Group Editorial Director of AGiLE Business Media.

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