(CHICAGO) For more than a year, food makers and other consumer products companies have passed on much of the burden of rising commodity costs to consumers.
In fact, companies like H J Heinz and Hormel Foods proved again with earnings forecasts and announcements on Friday that this was still the case early this year, fuelling a rally in food stocks. But that relief could prove short-lived, because 2008 could be the year American consumers start shunning branded products for less expensive private-label alternatives, industry experts warn.
Such a shift could hurt profits at the companies that already have exhausted most measures to cut costs and become more efficient over the past several years in the wake of soaring prices for wheat, cocoa, milk and energy, just to name a few. ‘When you say input costs are going up 6 per cent and you are only getting 4 per cent net pricing, where do you make up the rest?’ asked Gregg Warren, an analyst at Morningstar.
Rising commodity costs and economically stressed consumers were expected to be the main topics when consumer products company executives meet analysts at the Consumer Analyst Group of New York conference in Florida that began yesterday.
For the past several years, many of the big food and consumer products companies have tried to mitigate rising commodity costs by cutting jobs, closing plants and taking other steps to become more efficient.
They also passed some of those costs to consumers with price increases, generally finding little resistance as shoppers continued to eat brand-name foods and use brand-name soap, while cutting back in other areas.
But the pricing power is not unlimited by any means, Ken Harris, a principal at consulting firm Cannondale Associates, said. While the round of price increases that went into place a few weeks ago might not cause a major change, the next will, he said.
Concerns about higher costs and weaker pricing power had led to a sharp downturn in stocks that would normally perform well as defensive plays in an economy that might be on the brink of a recession. Even after a rally on Friday morning, the Standard & Poor’s packaged foods index is down 5 per cent this year.
The S&P household and personal care index is down 8 per cent.
‘We think investors remain rightfully focused on US economic weakness and the potential effects around the globe,’ Bear Stearns said in a research note about the Florida conference.
Consumers have already started trading down in juice and milk, said Brian Morgan, a senior research analyst at Euromonitor International. He also said he expected to see moves down in other staples like bread.