Food companies adjusting well to high costs

by FoodBusinessNews.net Staff
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STAMFORD, CONN. — Major U.S. food companies have been able to successfully limit the impact on margins of soaring commodity and energy input costs, according to Archstone Consulting. The research showed cost increases have partially been passed on to consumers through higher prices and some has been offset in other areas of business.

"The dual challenge of managing cost inflation and soft consumer demand were the critical business issues for U.S. food companies coming into 2008," said Dave Sievers, consumer products and retail practice leader for Archstone Consulting. "We had every expectation that this would be a very difficult year. After a rough period in 2007, the major branded food companies have been able to reverse declining margins. Companies like Kraft, Kellogg and Hershey have seen significant improvements in gross margins during the second quarter. If those trends continue and commodities stabilize or even begin to come down, we can start to see the light at the end of the tunnel for those companies."

Archstone said the increase has been just over 5% in all retail food categories in the past year and 10% or more in some especially affected categories such as dairy.

"What is surprising, however, is that the consumer is by no means absorbing all of the impact of surging commodity costs," said Patti Muldowney, director of the study. "A significant amount of commodity inflation is being offset by efficiencies elsewhere in the supply chain and company gross margins are down since the crisis began. We are seeing the pain of commodity costs almost equally shared across consumers, investors and companies’ ability to operate efficiently."

Archstone said because most large food companies have said they will expand investment in advertising and marketing in order to maintain brand advantage and pricing capabilities, there could be a shift toward operating margin management and potentially even additional price increases.

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