Retailers thwart food-price hikes

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Recent price increases in a number of categories should be helping to bolster profit-pressed food companies. But industry executives said Wal-Mart Stores' refusal to accept price increases and the growth of private-label products, among other factors, are thwarting them.

Wal-Mart has still not marked prices up on ready-to-eat cereal despite announcements by the top cereal marketers in February that they would raise prices 2% to 3% due to rising commodity costs, according to retail consultant Burt Flickinger.

A Wal-Mart spokeswoman would not comment on whether the company accepted the increases, offering only that "everyday low prices continue to be our goal when working with our [vendors]."

But Mr. Flickinger noted that "as same-store sales start to swoon, [Wal-Mart] is getting more aggressive at rejecting price increases."

A Kraft Foods spokeswoman categorized reports that any of its retail accounts-including Wal-Mart-have not accepted price increases in recent months for cereal, cookies and crackers and coffee, among other categories, as "erroneous." Both Kellogg Co. and General Mills declined to comment.

Certainly, Kraft, along with Kellogg and General Mills, would be hurt by a Wal-Mart decision not to accept the hikes. According to securities filings, Wal-Mart accounted for about $3.6 billion of Kraft's $29.7 billion in 2002 revenue; about $996 million of Kellogg's $8.3 billion in 2002 revenue and about $954 million of General Mills' $7.9 billion revenue for its fiscal 2002, which ended in May.

As food industry giants gather in Chicago this week for the Food Marketing Institute's 2003 FMI Show, how to work with retailers to drive profits is bound to be a topic under discussion in the aisles. Even in retail channels where price increases have been accepted, "many consumers have reacted to the higher prices by trading down to private label," said Credit Suisse First Boston analyst Dave Nelson.

losing share

Mr. Nelson's analysis of A.C. Nielsen research found that during the 13-week period ended March 23, leading branded players lost share to private label in 15 of 22 categories in which brands had been sold at a higher price vs. the previous year. Kraft, for example, lost share in cookies, coffee and salad dressings to private label brands during the period.

According to recent research from Information Resources Inc. and C&M Marketing, private label-brands (with sales of $44.4 billion in food, drug and mass outlets as of mid-year 2002) have grown nearly twice as fast as national brands during the last five years. Private Label Manufacturers Association President Brian Sharoff said the growth cannot in all cases be attributed to the price advantage of private label, but in some categories, like cereal, "there is price-point resistance ... which forces consumers to look elsewhere for the product." For the 52 weeks ended March 23, private-label cereal sales grew 3.3% while leader Kellogg grew a mere 0.9%, General Mills fell 2.6% and Kraft's Post fell 0.8%

There would be even more of a shift toward private label, had marketers not increased trade spending. Although vowing to limit expenditures in areas like price promotion, food companies have actually upped discounts in many cases, "defeating the purpose of price increases," one Wall Street food analyst said. "We're seeing more discounting where there isn't new news, and marketers don't have new news on 98% of their products," he said. The lack of innovation activity may be a result of earnings pressure, he said, which has many companies focusing on "getting their internal house in order," including eliminating underperforming products.

same price

"Prices may have gone up, but marketers continue to promote deeply-offering two [boxes] for $4 or $5 in cereal, for example-so they're really offering the same retail price" to consumers, said a merchandising executive for one Midwest retail chain.

"Food companies have done an excellent job at holding costs," he said. The question, he wonders, is how they can afford it given the rising costs of employee benefits, fuel and a host of other things.

contributing: bradley johnson

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