Maintaining prices important in the face of added pressure

by Keith Nunes
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As 2009 unfolds it is apparent that prices, specifically the prices retailers and food service operators pay food manufacturers as well as the end consumer prices, remain extremely contentious issues.

Even though food and beverage manufacturers are in most cases still having to cope with higher-than-average raw material costs, these businesses increasingly are finding themselves under pressure to lower prices immediately.

The pressure is coming from two fronts, most notably on account of the recession experienced by the overall U.S. economy as well as from retail and food service operators who are experiencing very discerning shoppers whose confidence in the overall economy has been shaken. Jeff Noddle, the chairman and chief executive officer of SuperValu, Inc., calls the situation a "battle," predicting it will rage throughout the first half of 2009 and will only moderate in the second half of the year.

Ironically, a day after Mr. Noddle declared the situation a battle Kellogg Co. announced it was raising the prices on many of its products. The company cited the high costs of commodities, and several industry analysts suggested General Mills may follow Kellogg’s lead if it is perceived that Kellogg has been able to pass on the price increases with little resistance.

But the issue of price goes beyond the negotiations between manufacturers and customers to include the negative publicity food companies face as they attempt to pursue pricing strategies. To manage costs during the worst spikes in commodity costs, food manufacturers initiated cost management and cost reduction programs. These undertakings ranged from shrinking product package sizes in order to save on packaging costs and to help improve logistics costs to reformulating ingredients in an effort to reduce the presence of the most costly raw materials.

Some of these initiatives now are coming under fire with newspaper and television outlets criticizing the industry for shrinking package sizes. One consumer advocate alleges that what food manufacturers are doing amounts to a game of "Three-card Monte."

Compounding the problem is that the response to cost management by food companies stands in contrast to similar efforts undertaken by many retailers and food service operators. When cheese costs, for example, spiked in 2007 pizza chains began to cut back on the amount of cheese they put on pizzas. Little, if anything, was said at the time about consumers getting less for their money. Along the same lines, other food service companies began experimenting with selling smaller portions, essentially saving on costs while selling the idea of portion control as a healthy option.

Wal-Mart Stores, Inc. also has used its efforts at improving the sustainability of its infrastructure as a point of differentiation in the market as well as a cost savings initiative. Yet, it is the steps taken by retailers such as Wal-Mart that have caused food companies to draw the ire of various media outlets and consumers. Several elements of Wal-Mart’s Packaging Scorecard and sustainability initiative have pushed its suppliers to change how they manufacture and formulate many products. Some of these changes include shrinking package sizes to improve logistics margins.

Retail and food service operators have managed to place the responsibility for rising food prices squarely on the shoulders of food manufacturers. At the same time, they are taking credit for being more environmentally responsible and better focused on the health and wellness of their customers.

Price as an issue is not going to go away. Food manufacturers are advised to better communicate why the prices consumers are seeing are going up and explain the steps being taken to manage the situation. The current economic outlook facing food and beverage companies is one of volatility. Commodity costs may continue the current roller-coaster ride and companies would be well advised to evaluate their current pricing initiatives with an eye toward the future rather than the short term.

This article can also be found in the digital edition of Food Business News, January 20, 2009, starting on Page 9. Click here to search that archive.

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