Food Companies Passing More Cost Hikes to Consumers

BOCA RATON, Fla. _ Sara Lee Corp., stung by record-high wheat prices, plans to raise prices on its namesake bread this spring, the fourth such increase in just a year and a half.

The dilemma for the Downers Grove, Ill.-based company and America’s other food purveyors is that consumers may be close to being done eating higher food prices being fed to them by manufacturers and retailers.

Already there is evidence that people are adjusting their shopping habits, in some cases trading down after years of splurging on everything from premium coffee to organic pasta.

Take Sara Lee’s actions and multiply by hundreds of manufacturers and thousands of food products, from cheese to corn chips, and it’s clear why food prices are rising at a pace not seen in almost 20 years.

The trend was underscored Wednesday, when a government report showed food prices played a key role in driving up the overall inflation rate. It’s also a huge topic here, where food makers like Sara Lee are gathered for an annual industry conference.

Food companies are under stress from what they call “unprecedented” increases in the cost of basic commodities like grain and milk, coupled with a dramatic rise in energy prices. So, they are pushing down their cost increases to consumers, and for the most part are succeeding.

But food companies also are wondering where the consumer’s limit is, particularly as the U.S. economy softens. When will shoppers switch from name brands like Sara Lee to cheaper private labels, or cut back on grocery spending altogether?

“This is the hot topic,” Brenda Barnes, chief executive of Sara Lee said at the annual Consumer Analyst Group of New York conference in Florida. “What’s happening with the consumer’s spending habits?”

Repeat that question to some shoppers and the answer seems clear: They are changing their habits right now.

Pausing in the cereal aisle of an Ultra Foods store in Forest Park, Ill., Wednesday, Joyce Jackson quickly grew exasperated talking about what she sees as ever-inching up food prices.

“The things I buy every week, they go up. It seems it’s a few pennies every week,” Jackson said. “Eggs are ridiculous, cheese, sugar, flour. Flour used to be one of the most reasonable things you can buy.”

Lawanda Miller is a coupon-cutter, and her accordion-shaped coupon organizer accompanies her on her grocery-shopping trips. She buys only products on sale and then checks her file to see if she’s got a coupon to lower her grocery bills more.

That means shopping at various stores, and now the Chicago resident will add another store to her list. Frustrated by increased prices _ and solely because of those prices _ she joined Sam’s Club Wednesday, reasoning that by buying products in bulk, she’ll save more money.

Erwin Dreschler, chef/owner of Erwin Cafe in Chicago, said he’s become more resourceful and is comparison-shopping and making substitutions just as consumers are.

He’s stopped using baby vegetables, the prices of which “have gone through the roof.” Instead, he’s trying to increase the glamour of less expensive produce like kale, cabbage and turnips. To thin a pureed soup, the restaurant is using a combination of milk and chicken stock, rather than just milk. He’s using less expensive cuts of meat and then braising them rather than buying more expensive cuts. And he’s shopping around much more than he used to for the best prices on cheese.

“We’re not just ordering for ingredients anymore,” Dreschler said. “We’re ordering for ingredients and price.”

Food prices, for the most part, are what economists call “inelastic” _ that is, demand doesn’t shift much as consumers’ income swings. In other words, when money gets tight, a new TV gets axed before the weekly installment of Oreo cookies.

Food prices are also notoriously volatile, subject to short-term swings from floods, droughts and the like. But in the past year, some significant longer-term trends appear to have taken hold, adding to upward price pressure.

Many economists say the burgeoning ethanol industry is eating up so much corn output that it’s helping to push up the price of corn. And corn is at the heart of the food system, a key ingredient in everything from animal feed to soda pop.

Meanwhile, wheat supplies are at lows not seen since the 1970s. In fact, global demand for all sorts of grain, dairy products and meat has risen as economic growth allows more people in more countries to improve their diets.

To fend off rising costs, food companies work to improve their productivity and cut costs. They enter into complicated futures contracts to hedge against cost swings. But they also simply pass their costs down into the grocery aisles, where consumers have seen some shocks in recent months.

Bread prices were up 10 percent year over year in January and December, according to the Bureau of Labor Statistics. Cheese and milk prices in recent months have posted several months of double- digit price hikes, their biggest spikes since at least the late 1990s. Overall, food prices have risen at nearly a 5 percent year-over-year rate in recent months.

Not all food companies see a breaking point yet. In fact Ken Powell, chief executive of suburban Minneapolis-based General Mills, maker of everything from cereal to soup to yogurt, shrugged off any suggesting that they will see a consumer pullback. “If anything, we see our performance accelerating as the year goes on,” he told analysts in Florida.

Omaha, Neb.-based ConAgra, owner of the Healthy Choice, Banquet and Chef Boyardee brands, plans to raise prices on 95 percent of its product portfolio beginning in March.

ConAgra was far from alone on the pricing bandwagon. Irene Rosenfeld, chief executive of Northfield, Ill.-based Kraft Foods, told the analyst assembly that her company would implement more price hikes to keep up with soaring cheese costs.

Kraft’s barrel cheese costs _ the price it pays suppliers _ were 26 percent higher last year than their 10-year average. Kraft’s inability to fully pass down those costs to consumers hurt its fourth quarter earnings.

But Kraft has since pumped up marketing of its cheese, and thus believes it will be better positioned to pass on price hikes this year. “We feel like we are in a much stronger position to manage our cheese margins,” Rosenfeld said, alluding to boosting profit margins through price increases.

In the first half of its fiscal year, Sara Lee, owner of the Jimmy Dean and Hillshire Farms brands, has passed down to consumers all but $10 million of its $170 million in cost increases. And it has told Wall Street that for the full year, it expects to use price hikes to cover all of its $300 million or so in commodity cost increases.

Sara Lee, Kraft and other food companies are betting that their famous brands will help make price hikes more palatable to consumers, who might be tempted to stray to cheaper, less-well known alternatives.

The food firms invest millions in their best brands, building them up as badges of quality and reliability. When the brand equity mojo is working _ even in tough economic times _ “the consumer believes in the brand,” Barnes said.

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