Price Increase Leading to Weak Sales
Companies including General Mills, Kraft Foods Inc. and ConAgra Foods Inc. have raised prices on many of their products in the last year, as they grappled with soaring costs for everything from grains and dairy products to packaging and fuel.
"It's commodities, commodities, commodities and whether or not there's an ability to pass on those costs," said Paul Mariani, an investment banker with Variant Capital Advisors. "The question is how can they sustain volume with those price increases."
U.S. consumers have balked at price increases, often turning to cheaper brands or cutting back altogether. Still, companies see the increases as a necessary way to keep their profit margins.
"We chose to accept modest (market) share losses in the short term to protect profits," said Tony Vernon, president of Kraft North America, at the annual Consumer Analyst Group of New York conference in Boca Raton, Fla.
Kraft, which is planning to split into two companies later this year, reported fourth-quarter earnings that saw prices rise 7.6% on average, resulting in a 1.5% decline in both volume and mix of products sold. A negative impact from mix implies the company sold more lower-priced products.
In North America, the volume decline was the same, but the price increase was 8.5%, which suggested to Barclays Capital analyst Andrew Lazar that Kraft "did not see rapid fall-off in volume in its core U.S. business that some other packaged food peers have reported recently".
Vernon, who will become chief executive of the North American grocery company to be called Kraft Foods, said that was because the company was first with its price increases, so consumers had less "sticker shock" from Kraft lately.
He also told Reuters that the company has been very successful with its strategy of introducing smaller package sizes, which carry lower price tags, in order to appeal to consumers with limited budgets.
ConAgra, maker of Orville Redenbacher's popcorn and Healthy Choice meals, has seen a similar trend. Its chief executive, Gary Rodkin, told Reuters that an industry-wide slowdown in sales volume seen in North America since Thanksgiving, was probably due, at least in part, by the "cumulative effect of pricing actions over the last six or nine months."
Weak sales volume led General Mills to cut its full-year outlook last week.
The pressure on U.S. consumers also showed up in Wal-Mart Stores Inc.'s earnings, as the company's push to cut prices to bring shoppers to its U.S. stores cut into profits. Wal-Mart said it planned to keep cutting prices in coming months, too.
"There is a new normal with customers," Wal-Mart chief financial officer Charles Holley told reporters. "Markets are more volatile, gas prices are more volatile, and so, I think the customer is going to continue to look for ways to save money because they don't know what's around the corner."
From the February 22, 2012, Prepared Foods' Daily News.