Food takes bigger bite from wallet (Chicago Tribune)

Rising commodity prices passed on to consumers

By Mike Hughlett and Mary Ellen Podmolik

BOCA RATON, Fla. - Sara Lee Corp., stung by record-high wheat prices, plans to raise prices on its namesake bread this spring, the fourth such increase in just 11/2 years.

The problem for the Downers Grove-based company and America's other food purveyors is consumers may be close to done eating higher prices fed them by manufacturers and retailers.

While Sara Lee hasn't seen it, already there is evidence that people are adjusting their shopping habits, in some cases trading down after years of splurging on everything from premium coffee to organic pasta.

Last month, Jeff Noddle, chairman and CEO of Jewel Food Stores parent Supervalu, lowered his company's guidance for 2008, reportedly saying it was already seeing customers buying cheaper brands to save money.

But take Sara Lee's actions and multiply it by hundreds of manufacturers and thousands of food products, and it's clear why food prices are rising at a pace not seen in almost 20 years.

The trend was underscored Wednesday, when a government report showed food prices played a key role in driving up overall inflation. It's also a huge topic here, where foodmakers such as Sara Lee are gathered for an annual industry conference.

Food companies are under stress from what they call "unprecedented" increases in the cost of basic commodities such as grain and milk, coupled with a dramatic rise in energy prices. So, they are passing along their cost increases to consumers and for the most part are succeeding.

But food companies also are wondering where the consumers' limit is, particularly as the U.S. economy softens. When will shoppers switch from name brands such as Sara Lee to cheaper private labels, or cut back on grocery spending altogether?

"This is the hot topic," Brenda Barnes, chief executive of Sara Lee said at the annual Consumer Analyst Group of New York conference in Florida. "What's happening with the consumer's spending habits?"

Repeat that question to some Chicago-area shoppers and the answer seems clear: They are changing their habits right now.

Pausing in an Ultra Foods store in Forest Park on Wednesday, Maywood resident Joyce Jackson grew exasperated talking about what she sees as ever-climbing prices.

"The things I buy every week, they go up. It seems it's a few pennies every week," Jackson said. "Eggs are ridiculous, cheese, sugar, flour. Flour used to be one of the must reasonable things you can buy."

Lawanda Miller only buys products on sale and then checks to see if she's got a coupon to lower her bills more.

That means shopping at various stores, and now the Chicago resident will add another to her list. Frustrated by increased prices -- and solely because of those prices -- she joined Sam's Club on Wednesday, reasoning that by buying products in bulk, she'll save money.

Erwin Dreschler, chef/owner of Erwin Cafe in Chicago, said he's become more resourceful: comparison-shopping and substituting.

He's stopped using baby vegetables, the prices of which "have gone through the roof." Instead, he's trying to increase the glamour of less expensive produce such as kale, cabbage and turnips. To thin a pureed soup, the restaurant is using a combination of milk and chicken stock, rather than just milk.

"We're not just ordering for ingredients anymore," Dreschler said. "We're ordering for ingredients and price."

Oreos over new TV

Food prices, for the most part, are what economists call "inelastic" -- that is demand doesn't shift much as consumers' income swings. In other words, when money gets tight, a new TV gets axed before the weekly installment of Oreo cookies.

Food prices are also notoriously volatile, subject to short-term swings because of floods, droughts and the like. But in the past year, some longer-term trends appear to have taken hold.

Many economists say the burgeoning ethanol industry is eating up so much corn it's helping to push up the price of corn. And corn is at the heart of the food system, a key ingredient in everything from animal feed to soda.

Meanwhile, wheat supplies are at lows not seen since the 1970s. In fact, global demand for all sorts of grain, dairy products and meat has risen as economic growth allows more people in more countries to improve their diets.

Bread prices were up 10 percent year over year in January and December, according to the Bureau of Labor Statistics. Cheese and milk prices have posted several months of double-digit price hikes, their biggest spikes since at least the late 1990s. Food prices have risen at nearly a 5 percent year-over-year rate recently.

Not all food companies see a breaking point yet. In fact Ken Powell, chief executive of suburban Minneapolis-based General Mills, maker of everything from cereal to soup, shrugged off suggestions of a consumer pullback. "If anything, we see our performance accelerating as the year goes on," he told analysts in Florida.

Omaha-based ConAgra, owner of the Healthy Choice, Banquet and Chef Boyardee brands plans to raise prices on 95 percent of its products beginning in March.

Kraft plans increases

ConAgra was far from alone. Irene Rosenfeld, chief executive of Northfield-based Kraft Foods, told the analyst assembly that her company would implement more price hikes to keep up with soaring cheese costs.

But Kraft has pumped up marketing of its cheese, believing it will be better positioned to pass on price hikes. "We feel like we are in a much stronger position to manage our cheese margins," Rosenfeld said, alluding to boosting profit margins with price hikes.

In the first half of its fiscal year, Sara Lee, owner of the Jimmy Dean and Hillshire Farms brands, has passed down to consumers all but $10 million of its $170 million in cost increases.

Sara Lee, Kraft and other food firms are betting their famous brands will help make price hikes more palatable to consumers, who might be tempted to stray to cheaper alternatives.

The food firms invest millions in their best brands, building them up as badges of quality. When the brand-equity mojo is working -- even in tough economic times -- "the consumer believes in the brand," Barnes said.