Processors see few alternatives to pricing

by Editorial Staff
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BOCA RATON, FLA. — Passing price increases on to consumers was a common theme discussed throughout the Consumer Analyst Group of New York annual conference, held Feb. 22 to Feb. 25 at the Boca Raton Resort & Club. Rising input costs have forced food and beverage manufacturers to take pricing, and many noted during their CAGNY presentations that they will take additional pricing later in the year.

Gary Rodkin, the president and chief executive officer of ConAgra Foods, Inc., Omaha, said ConAgra’s price increases are beginning to appear in the marketplace on some products and more price increases are to come.

“We are confident that these moves are the right thing to do given the inflation of our input costs,” he said. “While not easy, pricing is not a choice; it is an imperative. We cannot ignore the impact of dramatically increasing input costs on margins.”

Mr. Rodkin added, “Any way you look at our products, even with some price increases, they continue to be a tremendous value. Just take a look at the center-of-the-store pricing versus that in the perimeter and you will know what I mean. Consumers certainly know this.”

A report published by Fitch Ratings, Chicago, on Feb. 22 and titled “Commodity inflation in a multi-speed world – Corporate winners and losers,” highlighted the challenges packaged foods companies face.

“During the current prolonged weak economic environment, consumers are not as tolerant of higher prices as they were prior to the recession,” the report stated. “Higher prices are often partially offset by lower sales volume due to price elasticity and competition. However, the strongest brand equities are most likely to have the least negative volume ramifications.

“Food companies that implement aggressive pricing too quickly are likely to accelerate customers’ switch to private label products. Highly commoditized products such as dairy products and bottled oils, and those with the widest price gaps versus private label are most at risk of this trade-down phenomenon.”

General Mills, Inc., Minneapolis, has added pricing equivalent to about a single-digit increase in a little over 50% of the company’s product portfolio in the United States. The pricing affects both the company’s U.S. retail and food service businesses.

“In terms of the way we are seeing pricing play out in the market, it’s pretty much what we had been projecting really for the last several months,” said Ken Powell, chairman and c.e.o., during CAGNY. “We are seeing some moderation in promotional impact, as we thought there would be, as we saw some higher inflation come through. We are seeing, as you are seeing, a number of manufacturers pass on some list price increases. As we have just announced, we are doing that as well.

“Obviously, as we do that, we are very aware that the consumer has choices here. That is why we work so hard on productivity and spend so much time on H.M.M. (holistic margin management) and so much time telling you about H.M.M., because we think that is an important part of the equation here. We really want to do everything we can to offset it.”

Tony Vernon, executive vice-president and president of Kraft Foods’ North America business, put the situation facing his company and the food and beverage industry in perspective during his presentation at CAGNY.

“… The operating environment continues to be challenging,” he said. “G.D.P. is weak, and unemployment remains high. Consumer confidence is low, and retailers are competing for shoppers on price like never before. Amid the worst recession in 70 years, how will we grow both our top and bottom line simultaneously?

“In the face of this consumer weakness, input costs continue to rise. In North America alone, we expect commodity costs to be up $700 million to $800 million this year. About half of our sales in the cheese and dairy, meat and coffee categories will be hit especially hard.

“With the stressed consumer and customer base, will we be able to price to offset these sharply higher costs? And if all that were not enough, category growth has stalled. Our categories have decelerated from a 5% compound annual growth rate to less than 2% in 2010. The overall industry has been even worse. In the 19 largest food and beverage categories, the average growth rate has plunged from about 5% to a 2010 reality that is essentially flat. So how do we expect to grow even at the low end of our 3% to 4% long-term target in 2011 given all of these headwinds?”

Dave Brearton, executive vice-president of operations for Kraft Foods, added pricing alone will not cover all the input cost inflation the company is seeing.

“We need a reliable stream of ongoing cost reductions, but saying it and actually doing it are two very different things,” he said. “It takes time to lay the necessary foundations and discipline for continuous improvement, continuous improvement that allows us to drive industry-leading cost savings without large restructuring charges.”

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