Vital Farms has approached egg price hikes ‘reluctantly and in small amounts’, CEO explains

Vital Farms CEO Russell Diez-Canseco joins Yahoo Finance Live to assess rising egg prices in an inflationary environment for consumers and their grocery bills, the egg producer's growth outlook, and its supply chain.

Video Transcript

DAVE BRIGGS: There are two sides to the story of eggflation. Joining us now is Vital Farms CEO Russell Diez-Canseco. Nice to see you, sir. Egg prices up nearly 60% in December versus at-home food increases just less than 12%. How do you justify these skyrocketing prices, sir?

RUSSELL DIEZ-CANSECO: I don't. We sure haven't raised our prices nearly as much as you are discussing. And I'd hate to be characterized as taking the other side of Senator Reid's argument because in many respects, I'm-- it's a head scratcher for us as well. Over the course of 2022, we certainly saw inflationary impacts to our key inputs like the grains we feed our girls and the diesel fuel that the truckers use to fuel their trucks as they deliver the eggs to the grocery stores. We've-- our approach to price increases has been to take them reluctantly in small amounts and, typically, in arrears, meaning after we've already seen the impact of cost increase.

That showed, in our financials over the last year, a compression of our gross margins, which a lot of investors ask me about and wondered why I didn't take prices higher sooner. The reality is, we're building a brand for the long haul. And we've grown our supply year in and year out for 15 years straight. We don't see a short-term supply and demand shock as an opportunity to just goose our profits. And that's not how we're operating. So I'm as befuddled as the senator is about why we're seeing inflation that's multiples of the inflation on the inputs that we use.

BROOKE DIPALMA: And I want to dive into that a little bit about response that you're getting from investors here. Last year, you had a record revenue, $92 million, up 42.4% year over year. Gross profit was 29.5 million compared to 19.8 million in 2021. When investors come to you and say these numbers, reiterate them to you, what's your response there?

RUSSELL DIEZ-CANSECO: So some of those numbers don't sound exactly like what our results have been. What I'd say is that we saw gross margins starting with a 2, gross margins in the 20s in the back half of last year on the back of real inflation in input costs. And that was a relatively low gross margin for us. Our hope in 2023 is that with the price increases we've put through, we can just get back to where we were a few years ago and certainly are not expecting to see outsized or record gross margins over time because for us, with the branded premium product that we bring to the market, it is a competitive market.

And we want to continue to make it available to more and more Americans, where we're only in a single digit percent of US households. Our goal is to be the biggest egg brand in America, and we have a long way to go. And we certainly don't want to choke off our growth by overpricing our product.

SEANA SMITH: Russell, speaking to that goal, how do you plan to get there? And when you take a look at the current landscape right now, clearly supply chain challenges has been something that your industry has been dealing with. How have you navigated that more recently? And how long do you see some of those challenges sticking around for?

RUSSELL DIEZ-CANSECO: It's so interesting. Our supply chain is so different from what I think the large egg producers have. We work with over 300 small family farms across eight states in the South. And we buy eggs exclusively from those farms, and they sell their eggs exclusively to us in multi-year contracts. The price we pay them is predictable for them, and we increase prices when grain costs go up so that they aren't upside down and stuck kind of paying the bill for inflation that we're seeing, the net result of which is we have a pretty reliable supply of eggs for our business.

And they have a pretty reliable cash flow for their business. Those things create resilience. And I think sometimes the pressures that especially public companies face to maximize profits in the short run lead them to under invest in things that we take pride in investing in. For example, we spend millions of dollars every year in people, training, and other resources to help our farmers be the very best egg farmers they can be.

Now, in any given period, I could be more profitable if I didn't spend all that money. But the payoff comes when we hit a challenge like the industry is seeing right now. And our farmers weather it and come out with flying colors. We've had very limited impact from avian influenza, for example. And I think that's because we just focus a lot on keeping our birds and our farms safe from it.

DAVE BRIGGS: Sir, I just want to come full circle and be clear about this. It sounds as though you actually agree with Senator Reid, without naming names, that some are price gouging when it comes to the prices of eggs.

RUSSELL DIEZ-CANSECO: All I would say is that it's a head scratcher for us. I don't see anything in my cost structure that would have led me to raise our prices by as much as you're reporting. We've taken just enough price to keep ourselves whole and continue to pay our farmers an appropriate profit for the work they do. I'm not suggesting anybody's price gouging. I'm just saying I can't explain why prices have gone as high as they have.

BROOKE DIPALMA: And very quickly here, you did just announce a new national food service relationship with True Food Kitchen. Where do you see that in your growth expansion? And ultimately, how do you see this rolling out nationally?

RUSSELL DIEZ-CANSECO: Yeah, so we love partnering with food service brands like True Food Kitchen that kind of share our values. They're doing such a great job of bringing healthy, clean label, nutritious food to more and more areas of the country. My family loves there-- loves to eat there. And in fact, it's my wife's choice for Mother's Day brunch. And so we're just thrilled to be able to partner with them. And I expect that with the next menu rollout, we should be on many of their menus throughout the country.

DAVE BRIGGS: All right, come see us here in New York. We'll have a little egg sandwich next time, all right?

RUSSELL DIEZ-CANSECO: Look forward to it. Good to see you.

DAVE BRIGGS: Sounds good. Vital Farms CEO Russell Diez-Canseco and Brooke DiPalma, thank you both.