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Raw material price hikes hit Kraft and Kellogg profits

By staff reporter , 30-Jan-2008

Financial results released by food giants Kraft and Kellogg disclose a drop in earnings on the back of mounting costs for raw ingredients.

Food companies battled to maintain margins throughout 2007 as the cost of commodities such as sugar and wheat spiraled, as the price of oil reached a high of $100 per barrel and weather-induced crop failures led to an undersupply of raw materials and volatility in the market.

 

 

 

Like many other food companies, Kraft and Kellogg passed on the price increases to the consumer.

 

 

 

Kellogg's prices up

 

 

For the fourth financial quarter ending December 29 2007, the cost of goods sold reached $1.6bn, up 9 percent from the same point the previous year when it totaled $1.47bn. This meant an increase of 8.5 percent for the whole year, up to $6.6bn from $6.08bn.

 

 

 

Operating profit for North America experienced a drop in the fourth quarter, down to $286m from $320m. However, the yearly operating profit was up a small amount, from $1.34bn to $1.35bn.

 

 

 

Net earnings were down in the fourth quarter, from $182m to $176m, while the yearly net earnings achieved an increase of 10 percent, from $1bn to $1,1bn.

 

 

 

"Despite significant additional cost pressures in 2007, our company posted another year of strong growth," said David Mackay, CEO.

 

 

 

"We also continued to invest cash back into the company's growth through higher up-front costs, a double-digit increase in advertising and several recent acquisitions."

 

 

As a result of raising retail prices to pass on higher commodity costs, Germany-based retailer Metro took Kellogg's products off its shelves.

 

 

 

Kraft profits fall

 

 

Financial results released today show an increase of 12.4 percent for Kraft's cost of sales over the year, up from $21.94bn in 2006 to $24.65bn in 2007.

 

 

 

The fourth quarter faced particular difficulties, with an 18.2 percent increase in the cost of sales, from $6.07bn to $718bn.

 

 

 

Operating income suffered in 2007, down 4.2 percent from $4.52bn to $4.33bn. However, net revenues were up 6.4 percent from $34.36bn to $34.36bn. Gross profit increased 1.4 percent from $12.42bn to $12.6bn.

 

 

 

Irene Rosenfeld, chairman and CEO, said: "We've significantly reduced our cost structure and strengthened our portfolio with the acquisition of Danone's global biscuit business and the announcement to exit the Post cereal business. While we face an unprecedented input cost environment, we enter 2008 with good momentum and remain confident that we will deliver reliable growth over the long term."

 

 

Kraft still managed to increase its yearly revenue by 8.4 percent, up to $37.24 from $34.36bn.

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