Fitch: Packaged foods look stable for 2009

by Staff
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CHICAGO — While many economic sectors are being pressured by current economic conditions, packaged foods are relatively stable, according to Fitch Ratings.

"The recent inclination for consumers to eat at home more often is positive for these companies," Fitch said. "Packaged foods are a good value even with recent price increases. Elevated input cost inflation over the past two years led packaged food companies to raise prices multiple times. Input cost inflation in 2009 is a mixed picture since it takes at least several months for lower costs to flow through earnings due to the timing of hedges and contracts."

Fitch said input cost inflation for 2009 is likely to exceed that in 2008 and as the year progresses packaged food companies may see some benefit from lower grain-related and energy costs.

Overall, ratings and outlooks for most companies in packaged foods are likely to remain stable.

"Although food is a non-discretionary purchase, consumers have choices about where to spend their food dollars and how much to pull back on total food spending," Fitch said. "Consumers have reduced spending at restaurants, particularly casual diners and are re-allocating that spending to food eaten at home. Packaged food companies have benefited and are expected to continue to benefit from this shift in spending patterns. Even with the price increases that have been taken by packaged food companies, there is a much lower cost to packaged foods bought at retail versus similar foods bought at a full-service restaurant."

Fitch noted the greatest risk for packaged food companies is consumers may increase purchases of private label substitutes, especially in commodity-like products.

Fitch also noted despite the recent drops in commodity and oil prices, input cost pressure will not subside materially for at least several months. Mid-single-digit sales and operating earning growth can be expected for many packaged food companies in 2009.

In the beverage category, Fitch said it expects ratings for companies to remain stable in 2009 as companies are able to generate meaningful free cash flow, improve cost positions, realize pricing and capitalize on international growth opportunities. Overall, U.S. demand for non-alcoholic beverages is expected to remain weak in 2009 with the convenience and gas channel under pressure. Branded water also is expected to suffer in 2009, and carbonated soft drinks are expected to continue volume declines. Consumers might be tempted to come back to C.S.D.’s when considering the relative value in retail price versus more expensive non-carbonated options, Fitch said.

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