Like other consumer-product makers, Sara Lee has raised prices in response to higher commodity costs. However, cost-cautious shoppers pushed back, causing Sara Lee's sales volume to decline. The company has said it will look to increase its market share by introducing new products, rather than lowering prices.
The Downers Grove, Ill., company's operating margin shrank to 4.9% from 9%.
Sales in the North American meat business were essentially flat compared to a year ago as the higher prices led to lower sales in volume terms. The price increases failed to cover higher commodity costs, Sara Lee said.
Fast-rising commodity costs pose a key challenge to food companies like Sara Lee, which buy raw goods in global markets and then process them into easy-to-use products like instant coffee, precooked sausages and frozen meals. The company's costs for commodities have risen nearly $1 billion over the last six quarters, with expectations they will rise an additional $90 million over the next two quarters.
Executives on a conference call said costs for the coffee-and-tea business have stabilized even as costs for materials like raw pork continue to rise.
For the latest quarter, profit dropped to $469 million from $833 million a year earlier. Excluding items such as impairment charges and gains or losses on the sale of businesses, adjusted earnings rose to $0.27 from $0.21.
Sara Lee will soon cleave itself in two, separating its North American meat-focused business, which includes brands like Jimmy Dean and Hillshire Farms, from its surging European coffee-and-tea unit. The company says the split will likely take place in the next six months.
Both units are in the process of raising prices to keep pace with surging commodity costs. Second-quarter results suggest the beverage business is having an easier time.
Adjusted sales in the coffee-and-tea business rose more than 11% as higher prices for products more than offset a related decline in volume. The company said the price increases are covering higher commodity costs for the first time in awhile.
Meat sales -- which include the North American retail and North American foodservice and specialty meats segments -- increased 2.3%.
From the February 6, 2012, Prepared Foods' Daily News.