Will food consumers bite back in 2008?
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 such as H.J. Heinz and Hormel Foods Corp proved again with recent earnings forecasts and announcements that this was still the case early this year, fueling a rally in food stocks.
But that relief could prove short-lived, as 2008 could be the year consumers say "enough!" and start shunning branded products for less expensive private-label alternatives, industry experts warn.
"The next round of (increases) will actually start to impact consumer behavior in a profound way," Ken Harris, a principal at consulting firm Cannondale Associates, said.
That could hit 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 percent and you are only getting 4 percent net pricing, where do you make up the rest?" asked Gregg Warren, an analyst at Morningstar.
Rising commodity costs and economically stressed consumers are expected to be the key topics when consumer products company executives meet with analysts at the Consumer Analyst Group of New York conference in Florida that begins today.
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 in the form of 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, Cannondale's Harris said. While the current round of price increases that went in 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 as defensive plays in an economy that might be on the brink of a recession.
Agencies
(China Daily 02/19/2008 page16)
