Can food companies keep spending? Commodity prices strain marketing

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despite skyrocketing commodity costs, profit-squeezed packaged- food companies are pledging to hold the line on marketing spending. But analysts are seriously wondering if it's possible.

As prices for meats, dairy and soybean oil hit historic highs, food companies already struggling to meet earnings expectations could do what they usually do: cut ad spending to make their numbers. But with analysts quick to note such cuts to crucial brand-building efforts, especially in the face of growing private label competition, marketers such as Hormel Foods Corp. and Kraft Foods instead hope that some consumer price hikes will be enough to keep them afloat. But will they?

"It's early in the process to know how it's going to play out, but while I don't think advertising is a discretionary cost, it's more discretionary than other things and unfortunately can't be helped by these events," said John McMillin, Prudential Securities analyst.

John Stanton, professor of food marketing at St. Joseph's University agreed, saying that as added costs drive companies to cut from various parts of the company, "marketing gets asked to take more than its fair share much of the time" because top executives see it as an expense. In the short run, he believes that marketing, particularly advertising, will take "big hits" as companies try to absorb these costs.

Hormel said last week it will raise prices of its grocery brands including Dinty Moore, Hormel Chili and Spam anywhere from 4.5% to 6.5% to relieve margin pressures that have put it way behind in terms of profit. Those price increases won't hit until June.

limited flexibility

Normally, admits Larry Vorpahl, VP-general manager of Hormel's Grocery Products division, consumer package-good companies don't have the flexibility to raise and lower prices, instead trying to manage yearly commodity fluctuations by increasing and decreasing levels of marketing support. But, he said, "we're banking on the fact that we're going to improve margins as prices go up and that way we can continue to advertise."

In the meantime, Mr. Vorpahl said, senior management has given its okay to "hold marketing steady," counting on the refrigerated meats divisions of the company to make up for shortfalls in the grocery division. Those divisions can immediately put through price hikes related to commodity prices, while the grocery division usually meets with resistance when it tries to raise prices. "Our obligation is to keep in front of consumers with advertising and consumer promotion" especially as private-label brands become more important in Hormel's categories, he said.

taking no chances

Kraft, under the gun in part for letting price gaps with private label get too large, said it already raised prices of cheese anywhere from 5% to 15% in its first quarter, earnings for which were down vs. the prior year. Private-label marketers are also expected to increase prices due to the nearly 70% year over year hike for commodity cheese, but Kraft is taking no chances. According to a statement by Jim Dollive, chief financial officer for Kraft, the company "remains committed to increasing our 2004 marketing investment by $500 million to $600 million," especially in key areas like cheese.

"I would hope that companies in turnaround situations like Kraft or General Mills will stick with their marketing plans at targeted levels as commodity costs tend to ebb and flow," said Lehman Brothers analyst Andrew Lazar. But, he added, "Much of that will likely hinge on package-goods companies' ability to put through price increases."

Companies Mr. Lazar rates among the highest, like Hershey Foods Corp. and Kellogg Co., "have the [profit and loss] flexibility to absorb the rising costs and still stick with marketing plans that accelerate the top line."

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