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Rising commodities prices take a bite out of packaged food sales



Price increases across most of the North American food industry have turned off many shoppers, leading to weak sales for some packaged food makers.


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," says 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. 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," says Tony Vernon, president of Kraft North America, at the annual Consumer Analyst Group of New York conference in Boca Raton, Florida.


Kraft, which is planning to split into two companies this year, reported fourth-quarter earnings on Tuesday. Across the company, prices rose 7.6 percent on average, resulting in a 1.5 percent decline in volume and mix of products sold.


In North America, the volume decline was the same, but the price increase was 8.5 percent, 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.


He also told Reuters that the company has been very successful with introducing smaller package sizes, which carry lower price tags, 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 on Tuesday that an industry-wide slowdown in sales volume 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.


Source: Reuters


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