Rising prices harder to swallow in 2009

By Sarah Hill

- Last updated on GMT

Related tags: Food companies, Consumer price index

Food manufacturers will find it harder to pass on rising costs to consumers next year and, in a shaky economy, competition will remain intense, according to a new report.

Despite recent drops in commodity and oil prices, input cost pressure is not expected to subside materially for at least several months, said the Fitch 2009 US Packaged Foods Outlook: Sector Stability Despite Weak Economy.

Many packaged food companies have achieved higher pricing recently, which is likely to continue in 2009, but the report added: “The magnitude of pricing actions consumers are willing to accept when they are already being squeezed by the shaky economy is a delicate balance.”

Among the sort of products likely to suffer are portion control, or calorie-controlled packs, as it will become more difficult to persuade consumers to buy them in tight economic times when they can divide their own portions.

However, Fitch added that new products such as Campbell's Select Harvest soups with easy to understand ingredients, heart-healthy sodium levels and no monosodium glutamate (MSG) were “on target with consumers”.

The report said: “Packaged food companies need to maintain higher levels of brand building to support new products and keep the value of existing products at the forefront of consumers' minds.

“Competition is expected to remain intense. Companies with higher margins such as General Mills, Inc., Kellogg Company, Campbell Soup Company, and H.J. Heinz Company have greater financial flexibility to invest in their brands to preserve or gain market share relative to competitors.

“Innovation is likely to continue to focus on perceived health and wellness and convenience. However, convenience will be a tougher sell in this environment.”

Food forecast

The Consumer Price Index (CPI) for all food is forecast to rise four-to-five percent in 2009, according figures from the USDA's Economic Research Service.

These above-average changes in food price indices are on top of a forecast CPI increase of 5.5-6.5 percent for 'food at home' in 2008 and a final 2007 increase of 4.2 percent.

The highest price increases for 2008 are for eggs, fats and oils, cereals and bakery products, and dairy products.

The Fitch report concluded that in 2009, the advantages gained in the weak economy were likely to outweigh the disadvantages for US-based investment grade packaged food companies.

Packaged food companies should continue to benefit from a shift in spending patterns as consumers cut down on eating out and eat at home more, which is positive for such companies, it added.

Although there is also likely to be a spending shift towards private label goods.

The report said: “This shift is likely to be more pronounced for commodity-like, less differentiated products, such as cheese.”

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