Economy May Be Rotten, but It's Ripe for Package Food

Campbell, Kellogg, Kraft Sales Jump as Consumers Eat at Home More Often

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CHICAGO ( -- To hear the package-foods industry tell it, it's been a banner year.

Campbell Soup's sales rose 13% in the most recent quarter, a phenomenon CEO Douglas Conant said was aided partly by strapped consumers embracing condensed soup as an inexpensive meal alternative. Kellogg Co.'s second-quarter sales climbed 11% to $3.3 billion, a rise CEO David Mackay told analysts was due to "a reduction [by consumers] in out-of-home consumption."
Kraft Foods CEO Irene Rosenfeld
Kraft Foods CEO Irene Rosenfeld
General Mills saw U.S. sales increase 14% in its most recent quarter, reported last week, and Kraft Foods, which replaced American International Group on the Dow last week, reported a second-quarter sales jump of 21% to $11.2 billion. "The fact that people are eating at home more is certainly a positive," said CEO Irene Rosenfeld.

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The average grocery bill has risen 5% from a year ago, according to the Food Marketing Institute, as consumers increasingly trade Outback steaks for Hamburger Helper. Cheesecake Factory reported same-store sales down 4% for the second quarter, and Ruby Tuesday reported same-store sales down 10% at company-run locations.

Of course, there's a bit of a catch: Package-foods companies' sales increases can also be credited to their hiking prices to offset swinging ingredient costs. And that's taking a toll on profits. Despite its sales gains, General Mills' first-quarter net income declined 4% due to commodity hedging. Some ingredient prices fell sharply during the quarter.

Volume declines
But package-food companies have been raising prices all year, and ingredient costs remain historically high. "Nearly every branded package-food company saw volume declines worsen as a result of higher pricing," Credit Suisse analyst Robert Moskow wrote, analyzing ACNielsen data for the 12 weeks ended Sept. 6. "Dollar sales growth for the large-cap package-foods companies was 2.2%, driven by 7.5% pricing and offset by a 4.9% decline in volume." He noted that Sara Lee, General Mills and Heinz were all up in volume, while Kraft and Campbell were slightly down.

Wachovia analyst Jonathan Feeney, however, predicted that as commodity prices stabilize, margins will grow.

Tim Hammonds, FMI president, said consumers are eating at home more but are not showing a renewed interest in cooking, which is why a lot of products seeing the biggest bump are the easiest to prepare: cereal, sandwiches, ramen, and macaroni and cheese.

Jeff Harmening, president of General Mills' Big G Cereals, pegged cereal's value last week at 50ยข per serving -- including the milk. "People are eating more meals at home today, and cereal is a quick, convenient option for them," he said. Ms. Rosenfeld said sales of Kraft's Macaroni & Cheese, which she described as "our icon of value-oriented meal solutions," grew 20% in the most recent quarter. Oscar Mayer deli meats, she added, "are on fire."

Run on Ramen
Meanwhile, sales of Maruchan Ramen noodles are up across the board. "It's because of the economy," said VP-Marketing Rick Kester. "The same thing happened in the [recessions of] the '70s and '80s," despite the company's spending only "a couple of million dollars" on marketing each year. (Maruchan noticed its sales accelerating beyond the normal pace back in January. According to Information Resources Inc., sales are up between 5% and 40% depending on the product.)
Ramen chicken
Ramen chicken

And while folks seem to be less able to afford dinner out, it looks like restaurant breakfast and lunch are starting to weaken as well. "Breakfast away from home is slowing, and restaurant breakfast traffic was flat in the June quarter for the first time since 2004," said UBS analyst David Palmer said.

Mr. Palmer added: "As job losses deepen, we wonder if lunch and breakfast occasions could be next -- further bolstering breakfast businesses at General Mills and Kellogg."
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