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  • From: "Tradingpost" <tradingpost@lobo.net>
  • To: livingontheland@lists.ibiblio.org
  • Subject: [Livingontheland] Supermarkets complain
  • Date: Tue, 03 Mar 2009 11:58:18 -0700


Supermarkets complain that giant food manufacturers' wholesale prices have
risen even as commodity costs have fallen.
March 2, 2009
http://www.latimes.com/features/food/la-fi-foodprices2-2009mar02,0,5297068.s
tory


There's a tug-of-war underway over food prices between the nation's
supermarkets and giant food manufacturers including Nestle, Unilever and
Kellogg.

The nation's big grocery chains contend that food manufacturers have raised
prices too fast and too far, considering large drops in prices for fuel,
corn, wheat and other important commodities in recent months.

The food companies disagree and say they are still coping with many rising
prices themselves.

At issue are surging wholesale prices for products such as Nestle's
Dreyer's Grand Ice Cream, which rose 14% last April. Since then, the price
that farmers get for milk -- the main ingredient -- has dropped 36%.

Kraft raised the wholesale price of a box of its staple macaroni and cheese
an average of 9% in the last year, according to several supermarket chains,
despite 38% to 68% plunges in cheese and wheat prices. These increases
factor in the growing practice by the manufacturers of shrinking the weight
of the contents without reducing wholesale prices.

The grocers are fuming. One large grocery company operating in Southern
California has seen the wholesale price for a carton of Kellogg's Corn Pops
rise about 17% since June -- despite a 52% plunge in corn prices from their
peak that month.

"It's disingenuous to consumers that all commodity costs are coming down,
interest rates are coming down, everything is coming down, and [the
national brands] are taking their prices up," Steven Burd, chief executive
of Vons owner Safeway Inc., told investors Thursday.

Jeff Noddle, chief executive of Supervalu Inc., described the conflict as
"kind of a battleground with manufacturers right now. We are pressing for a
reduction in prices."

The costs of the raw goods that go into almost every food product have
fallen by substantial amounts, said Jonathan Feeney, an analyst at Janney
Montgomery Scott in Philadelphia.

The dropping price of grains "has widespread impact across food. Not only
are corn, soybeans and wheat key ingredients in products up and down the
snack, cereal, soup, bakery and other aisles, but they also serve as key
inputs in commodity protein and dairy production," he wrote in a recent
report to investors.

Unilever called the situation "complex," with pricing levels remaining
"both volatile and unpredictable in the medium to long term."

Grocers said that Unilever last year increased the wholesale price of its
Skippy peanut butter by about a nickel a jar after shrinking the contents
of the container by almost 10%.

"It is only recently that we have seen some price decreases for certain
commodities, such as milk, butter, wheat, corn, soybeans and edible and
mineral oils, but most of these still remain above historical averages,"
said Dean Mastrojohn, spokesman for Unilever U.S. "We also see prices for
certain commodities that we use, such as beef extract, tomatoes and tea,
continuing to increase."

Food manufacturers will eventually bow to pressure to moderate prices --
and some have already started to lower prices here and there -- as
consumers change buying habits and inventories of unsold products build,
said Christopher Shanahan, an analyst at consulting firm Frost & Sullivan
in San Antonio.

Price increases by national brands have left supermarkets in a difficult
position. Shoppers are fleeing to less expensive Wal Mart Stores Inc. and
other discounters, trading down to house brands and other products that
have smaller profit margins. In some cases, they are just going without.

"You would not believe the amount of food we have to put on the table,"
said Mike Dills, a bed salesman from Apple Valley who shops for a blended,
multigenerational family of four adults and six children.

Dills recently took advantage of a Stater Bros. special on two house-brand
30-ounce, self-rising pizzas for $7.

"They are the same quality as the Freschetta or DiGiorno brands that sell
for $5.99 each," Dills said.

Choices made by budget-conscious shoppers such as Dills are starting to
take their toll on Kraft, which saw its share of the frozen pizza market
slip late last year. It also has lost share in the macaroni and cheese and
cold cuts segments of its business.

Kraft spokesman Mike Mitchell noted that in each of those categories, the
company was still growing -- just not as fast as competitors, especially
house brands.

Kraft estimates that its overall cost of commodities will continue to
increase this year by about $200 million. That comes on top of a $2-billion
increase in commodity expenses paid by the company last year.

Kellogg also defended its prices by citing what it called continued high
expenses.

"In spite of the recent drop in commodities, prices for commodities are
still well above historical averages . . . and Kellogg Co. continues to
price behind commodities," spokeswoman Susanne Norwitz said.

Nestle said the cost of ingredients for Dreyer's increased 30% to 60% from
2003 to 2008, yet the company did not increase prices until last year.

"The consumer reality is, however, that over the last seven years, since
2002, the average price per serving of our ice cream has increased by only
a nickel," spokeswoman Kim Goeller-Johnson said.

Food companies are reluctant to unwind price increases because many guessed
wrong and are locked into futures -- or contracts to purchase supplies at
some distant date for a predetermined amount -- that have yet to reflect
the reversal in commodity prices, said Shanahan, the analyst.

Supermarket executives warn that they have the ability to retaliate by
shifting more of their products to "corporate," or house, brands. "I say
wait and see because we're going to chew them up on corporate brand,"
Safeway's Burd said.

Jack Brown, chief executive of Stater Bros., a 165-store chain
headquartered in San Bernardino, said he recently received a letter from a
"major manufacturer" he declined to name "outlining the next six quarters
of increases. Prices will go up 4% each quarter."

To counter rising prices, Stater Bros. has increased the number of house
brands it offers to give shoppers lower-priced alternatives. Over the last
year, Stater Bros. has increased the size of its store-brand offerings to
21% from 17%, but Brown is reluctant to go higher.

His company uses a strategy known in the grocery business as "everyday low
prices." It promotes lower prices all the time instead of having large,
periodic promotions. Name-brand staples are the bread and butter of that
business because their prices are easily comparable between store chains,
Brown said.

Kroger, which uses a strategy based on promotions and loyalty card
programs, has blunted some of the effect of increases by brand-name
producers by ramping up its own manufacturing. It makes about 43% of the
private-label items sold in its stores.

Kroger, the nation's largest grocer, operates 41 manufacturing plants,
including 16 dairies, seven bakeries, five grocery plants, three beverage
plants, three ice cream plants, three meat plants, two cheese plants and
two frozen dough plants.

Corporate, or house, brands now account for 27% of Kroger's grocery sales
and 34% of the units, or individual items, sold, said Dave Dillon, the
company's chief executive.

Kroger's Private Selection house-brand line -- one of three tiers its
stores offer -- hit $1 billion in sales last year.

Brown of Stater Bros. is hopeful that the greater reliance on house brands
by the grocery chains, combined with slowing sales rates for national
brands, will force the big food makers to reverse course.

"When a name brand wants to play ball and lower prices, they will find that
we will be the best friend they have ever had," Brown said. And he thinks
that will pay off for the national brands, his stores and shoppers. "I
really believe that if you take care of a customer, the customer will take
care of you."




  • [Livingontheland] Supermarkets complain, Tradingpost, 03/03/2009

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