Friday, November 5, 2010

Food Sellers Grit Teeth, Raise Prices

From the Wall St. Journal.

"Prices of staples including milk, beef, coffee, cocoa and sugar have risen sharply in recent months. And food makers and retailers including McDonald's Corp., Kellogg Co. and Kroger Co. have begun to signal that they'll try to make consumers shoulder more of the higher costs for ingredients."

Have you noticed the incredible shrinking food and sundry products? That's a hidden price increase. Now they're coming out of the shadows and jacking up prices boldly.

"Missteps could be costly when the economy remains weak. Many Americans, nervous about high unemployment, have pledged allegiance to their pennies and are willing to trade down on brands, switch supermarkets, opt for Burger King over Applebee's, or stop dining out altogether to save money."

Or just do without altogether, or make our own from scratch.

"Kraft Foods Inc., Sara Lee Corp. and General Mills Inc. already have said they'll raise prices on certain items. Starbucks Corp. backtracked on an August announcement that it would hold coffee prices steady, saying in September it would boost prices of larger and hard-to-make drinks. This week, cereal maker Kellogg hinted that it will be raising prices, without disclosing specifics.

Grocery chains Safeway Inc. and Kroger have said they'll pass supplier increases along to consumers.

Domino's Pizza Inc. is letting consumers decide whether they're willing to pay more. The company is offering two medium, two-topping pizzas for $5.99 each but has recently offered the option of converting one of them to a premium pizza, with more toppings, for an extra $2—a price increase, in effect.

At BJ's Restaurants, a casual-dining chain, prices early next year will be 2.5% higher—but only after upgrading its table settings and decor. "In this business, you can't just raise prices without improving the overall dining experience," BJ's Chief Financial Officer Greg Levin said in October.

Costs are being driven by growing demand for meat in China, India and other emerging markets. That's driven up grain prices, which in turn boost the cost of chicken, steak, bread and pasta. Grain prices also have been nudged higher by drought in Russia, planting problems around the world and speculative trading."


"Food prices are rising faster than overall inflation. The consumer price index for all items minus food and energy rose 0.8% over the year to September, the lowest 12-month increase since March 1961, the Bureau of Labor Statistics said. The food index rose 1.4%, however. The U.S. Agricultural Department is predicting overall food inflation of about 2% to 3% next year.

The current pressure is nothing like it was in October 2008, when food prices were rising at an annual rate of 6.3% and some hard lessons were learned when producers passed along those costs: Shoppers switched to private-label products."

Now would be a good time to go on the No-Label Diet or the Food Stamp Challenge diet.

"Ken Harris, a consumer foods-marketing consultant with Kantar Retail, said some food makers are targeting specific, low price points at retail—such as $1—and reconfiguring package sizes and products to fit the price.

That can backfire when commodity costs rise swiftly. Early this year, Ben Tabatchnick, founder of Tabatchnick Fine Foods Inc., a maker of high-end frozen soups, decided to release a new line designed with a suggested retail price lower than his other products. The 11.5-ounce soups, which started appearing in stores nationwide in October, are smaller than his typical 15-ounce Tabatchnick-brand products and carry a price tag of $1.99.

But in the last two months, Mr. Tabatchnick says his costs for vegetable oils, sugar, dried beans and other ingredients jumped 20% to 30%. "It's going to reduce the [profit] margin dramatically on the product," he says. "We're stuck."

So skip the middle man (in this case, food processors) and just buy the raw ingredients and make your own food. If you've been reading and heeding, you should already have a supply of raw ingredients built up in your pantry. In 2013, I expect pressure from commodities traders to slack off (because other markets will look just as juicy then as commodities do now), and the Fed devaluing our currency is all we have to worry about after that. It's possible all will come to a decent recovery after 2013, and the Fed intervention won't be needed any more--THEN expect a return to civil food prices, energy prices, and (hopefully) employment.


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