Higher Prices a Tough Sell to Shoppers

Comedian Jay Leno recently noted in his TV monologue Kellogg Co.’s decision to increase cereal prices and displayed his version of a new box of Rice Krispies. On the cover were Kellogg’s venerable Snap, Crackle and Pop, along with a new character he named “Ka-Ching.”

Kellogg, in fact, is just one of several consumer-products and services companies trying to nudge prices higher for their familiar brands, if just by 2% or 3%. Others include PepsiCo Inc., beer giant Anheuser-Busch Cos., General Mills Inc., Kraft Foods Inc., Hershey Foods Corp. and Cendant Corp.’s Avis car-rental unit.

But their effort is no laughing matter. The companies are waging a difficult battle with American consumers to win even modest price gains. The producers are making some headway, but the nation’s low inflation rate and poor retail sales illustrate how shoppers are constantly pushing back against higher prices.

So much so that some economists are less worried about inflation these days than they are about deflation -- a broad drop in prices that could do additional damage to the economy, workers’ wages and financial markets.

Kellogg and other companies, facing continued flat sales for many of their brands, nonetheless hope consumers will swallow at least small price increases so that the companies can keep growing.

A 2% jump for Frosted Flakes or Budweiser might not sound like much, but for these companies with billions of dollars in annual sales, it could mean the difference between delivering higher profits to their stockholders or not. Kellogg, General Mills and other food companies also are simply trying to cover their rising costs for ingredients, such as wheat.

Yet consumers, having already tightened their belts in the face of the lousy economy, are hesitant to spend extra cash for everyday goods at the supermarket or drugstore.

“I’m not willing to overpay” for a brand-name product, especially if similar but cheaper generic versions are nearby, said Karen Jong of South Pasadena, who shops at Safeway Inc.’s Vons and Kroger Co.’s Ralphs supermarkets. When it comes to items such as canned goods, baby powder or milk, “I don’t mind buying the store brands,” she said. “I save money.”

It’s that attitude that makes the push by Kellogg and others a risky move. If shoppers are turned off by the higher prices, they’ll look elsewhere -- and that could mean a loss of market share for the manufacturers.

The price for those Kellogg’s Rice Krispies, for instance, was $3.89 for a 13.5-ounce box last week at a Ralphs in Los Angeles, but Ralphs’ own brand of Crispy Rice was $2.79 for the same size box, a 28% savings.

‘Always on Trial’

“There’s an old saying that price is always on trial,” said George Belch, head of the marketing department at San Diego State University. “The consumer has been balking [at higher prices] because of the economic situation. But there’s obviously tremendous pressure on these companies to show better returns.”

And they are -- so far. PepsiCo, Cendant and Anheuser-Busch all cited higher prices recently for contributing to healthy profit gains in the fourth quarter of last year, even though in some cases their sales volumes were flat.

One of PepsiCo’s major bottlers, Pepsi Bottling Group Inc., also enjoyed strong earnings growth after raising its own prices. In announcing the results, Pepsi Bottling Chairman John Cahill said he was encouraged because the price “increases we took last quarter are holding.”

But prices are not holding in many other markets, where companies are too busy trying to keep their prices from falling further. McDonald’s Corp. is waging a price war with other fast-food restaurants. Rampant discounting by makers of disposable diapers resulted in lower fourth-quarter profit for Kimberly-Clark Corp., maker of Huggies, after excluding one-time charges.

The bottled-water market also has seen widespread price-cutting, led by Nestle, which is putting pressure on the bottled-water divisions of PepsiCo and Coca-Cola Co., among others.

AMR Corp.’s American Airlines and other battered carriers also need constant fare sales to keep their planes filled.

Put together, the nation’s “core” consumer price index, which measures the inflation rate except for the volatile food and energy sectors, rose only 1.9% last year, tying the 34-year low set in 1999, according to the Labor Department.

In that environment, the value of a company’s brand name goes only so far.

Kellogg spends more than $400 million a year on advertising to promote its brands, according to Advertising Age magazine. But that alone doesn’t guarantee added sales, and gone are the days when those brands could command hefty price increases every year, some experts said.

“There’s been a diminishing power in brands,” said Pam Murtaugh, a marketing consultant in Madison, Wis. “And if there is no difference in consumers’ satisfaction” between brand-name products and their generic rivals, “then it boils down to price.”

Pricing beer, cereal and other products is a daunting process that’s debated each day in corporate suites and studied endlessly in business schools. In the case of packaged goods, it’s an intricate game to balance what the manufacturer wants to charge, what the supermarket or other retailer aims to pay at the wholesale level and what the consumer ultimately is willing to pay at the checkout counter.

For the companies, pricing is so touchy a subject that they say little in public -- either for fear of tipping off competitors to their plans or raising the ire of antitrust regulators. Kellogg and most of the other firms that have raised prices lately declined to elaborate about their actions.

Supermarkets, too, are reluctant to explain in detail whether they’re simply passing along the manufacturers’ higher prices or whether they’re willing to absorb some of the price hikes to maintain their own sales volumes.

Fierce Competition

The supermarkets not only face fierce competition among themselves -- with all of them touting the lowest prices, they compete with their suppliers by offering their own store-brand goods. Depending on the product, a Ralphs or Vons brand might account for 10% or more of a store’s total shelf space for that item.

Albertson’s Inc., with 2,300 stores in California and 29 other states, regularly devises two-for-one sales or other promotions on various goods so that consumers don’t feel the full blow of a price increase by a product’s manufacturer, an Albertson’s spokesman said.

The promotions’ goal is that “the consumer is then giving me better volume” so the store “can survive on less” profit margin for those items, he added.

There are some products, such as gasoline and fresh fruit and other nonpackaged foods, whose retail prices swing widely with volatile movements in the prices of the underlying commodities.

More specialized items carry prices that are less volatile and often climb far faster than the rate of inflation. Example: Walt Disney Co.’s and Vivendi Universal’s theme parks recently raised their ticket prices by $2, to $47, even though park attendance has been sluggish.

For packaged household items, there’s a long list of variables that must be considered before companies ask shoppers to pay more. How will the competition respond? Will consumers pay more, or will they turn toward cheaper generic brands? Is a price increase needed to cover rising operating costs, as is the case at Kellogg and General Mills?

On the flip side, companies strive to be more efficient and lower their operating costs. That way they can avoid raising prices but keep investing in their brands’ marketing, thereby protecting market share and making more money.

Case in point: Procter & Gamble Co. The consumer-products giant posted higher fourth-quarter profit last month even though it is having to slash prices in several markets, including hair-care products, laundry detergents and disposable diapers.

In the soft-drink market, Coke, Pepsi and others also are grappling with flat sales and must be more efficient -- or come up with new brands -- to boost earnings.

Soda prices at supermarkets are constantly marked down amid “hyper-competition” between brands and consumers’ increasing preference for noncarbonated drinks, so “price increases on carbonated soft drinks are difficult to get,” said John Sicher, editor of trade journal Beverage Digest.

Sicher also said that Pepsi and others aren’t simply raising the basic price of their soft drinks. Instead, they’re devising new packaging and marketing methods -- selling more 12- or 24-can packs or putting more higher-priced bottles in convenience stores -- that ultimately lift their sodas’ overall price per ounce, he said.

Even so, the constant advertised sales of soft drinks at supermarkets and other mass merchandisers “have created a promotion-sensitive consumer,” said Belch of San Diego State. Clearly many drinkers are die-hard Coke or Pepsi fans, he said, but “many consumers are just trading back and forth and saying: ‘Which one is on sale?’ ”