Grocers, brands at odds on costs

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There’s a tug-of-war underway over food prices between the nation’s supermarkets and giant food manufacturers including Nestle, Unilever and Kellogg.

The nation’s big grocery chains contend that food manufacturers have raised prices too fast and too far, considering large drops in prices for fuel, corn, wheat and other important commodities in recent months.

The food companies disagree and say they are still coping with many rising prices themselves.


At issue are surging wholesale prices for products such as Nestle’s Dreyer’s Grand Ice Cream, which rose 14% last April. Since then, the price that farmers get for milk -- the main ingredient -- has dropped 36%.

Kraft raised the wholesale price of a box of its staple macaroni and cheese an average of 9% in the last year, according to several supermarket chains, despite 38% to 68% plunges in cheese and wheat prices. These increases factor in the growing practice by the manufacturers of shrinking the weight of the contents without reducing wholesale prices.

The grocers are fuming. One large grocery company operating in Southern California has seen the wholesale price for a carton of Kellogg’s Corn Pops rise about 17% since June -- despite a 52% plunge in corn prices from their peak that month.

“It’s disingenuous to consumers that all commodity costs are coming down, interest rates are coming down, everything is coming down, and [the national brands] are taking their prices up,” Steven Burd, chief executive of Vons owner Safeway Inc., told investors Thursday.

Jeff Noddle, chief executive of Supervalu Inc., described the conflict as “kind of a battleground with manufacturers right now. We are pressing for a reduction in prices.”

The costs of the raw goods that go into almost every food product have fallen by substantial amounts, said Jonathan Feeney, an analyst at Janney Montgomery Scott in Philadelphia.


The dropping price of grains “has widespread impact across food. Not only are corn, soybeans and wheat key ingredients in products up and down the snack, cereal, soup, bakery and other aisles, but they also serve as key inputs in commodity protein and dairy production,” he wrote in a recent report to investors.

Unilever called the situation “complex,” with pricing levels remaining “both volatile and unpredictable in the medium to long term.”

Grocers said that Unilever last year increased the wholesale price of its Skippy peanut butter by about a nickel a jar after shrinking the contents of the container by almost 10%.

“It is only recently that we have seen some price decreases for certain commodities, such as milk, butter, wheat, corn, soybeans and edible and mineral oils, but most of these still remain above historical averages,” said Dean Mastrojohn, spokesman for Unilever U.S. “We also see prices for certain commodities that we use, such as beef extract, tomatoes and tea, continuing to increase.”

Food manufacturers will eventually bow to pressure to moderate prices -- and some have already started to lower prices here and there -- as consumers change buying habits and inventories of unsold products build, said Christopher Shanahan, an analyst at consulting firm Frost & Sullivan in San Antonio.

Price increases by national brands have left supermarkets in a difficult position. Shoppers are fleeing to less expensive Wal Mart Stores Inc. and other discounters, trading down to house brands and other products that have smaller profit margins. In some cases, they are just going without.


“You would not believe the amount of food we have to put on the table,” said Mike Dills, a bed salesman from Apple Valley who shops for a blended, multigenerational family of four adults and six children.

Dills recently took advantage of a Stater Bros. special on two house-brand 30-ounce, self-rising pizzas for $7.

“They are the same quality as the Freschetta or DiGiorno brands that sell for $5.99 each,” Dills said.

Choices made by budget-conscious shoppers such as Dills are starting to take their toll on Kraft, which saw its share of the frozen pizza market slip late last year. It also has lost share in the macaroni and cheese and cold cuts segments of its business.

Kraft spokesman Mike Mitchell noted that in each of those categories, the company was still growing -- just not as fast as competitors, especially house brands.

Kraft estimates that its overall cost of commodities will continue to increase this year by about $200 million. That comes on top of a $2-billion increase in commodity expenses paid by the company last year.


Kellogg also defended its prices by citing what it called continued high expenses.

“In spite of the recent drop in commodities, prices for commodities are still well above historical averages . . . and Kellogg Co. continues to price behind commodities,” spokeswoman Susanne Norwitz said.

Nestle said the cost of ingredients for Dreyer’s increased 30% to 60% from 2003 to 2008, yet the company did not increase prices until last year.

“The consumer reality is, however, that over the last seven years, since 2002, the average price per serving of our ice cream has increased by only a nickel,” spokeswoman Kim Goeller-Johnson said.

Food companies are reluctant to unwind price increases because many guessed wrong and are locked into futures -- or contracts to purchase supplies at some distant date for a predetermined amount -- that have yet to reflect the reversal in commodity prices, said Shanahan, the analyst.

Supermarket executives warn that they have the ability to retaliate by shifting more of their products to “corporate,” or house, brands. “I say wait and see because we’re going to chew them up on corporate brand,” Safeway’s Burd said.

Jack Brown, chief executive of Stater Bros., a 165-store chain headquartered in San Bernardino, said he recently received a letter from a “major manufacturer” he declined to name “outlining the next six quarters of increases. Prices will go up 4% each quarter.”


To counter rising prices, Stater Bros. has increased the number of house brands it offers to give shoppers lower-priced alternatives. Over the last year, Stater Bros. has increased the size of its store-brand offerings to 21% from 17%, but Brown is reluctant to go higher.

His company uses a strategy known in the grocery business as “everyday low prices.” It promotes lower prices all the time instead of having large, periodic promotions. Name-brand staples are the bread and butter of that business because their prices are easily comparable between store chains, Brown said.

Kroger, which uses a strategy based on promotions and loyalty card programs, has blunted some of the effect of increases by brand-name producers by ramping up its own manufacturing. It makes about 43% of the private-label items sold in its stores.

Kroger, the nation’s largest grocer, operates 41 manufacturing plants, including 16 dairies, seven bakeries, five grocery plants, three beverage plants, three ice cream plants, three meat plants, two cheese plants and two frozen dough plants.

Corporate, or house, brands now account for 27% of Kroger’s grocery sales and 34% of the units, or individual items, sold, said Dave Dillon, the company’s chief executive.

Kroger’s Private Selection house-brand line -- one of three tiers its stores offer -- hit $1 billion in sales last year.


Brown of Stater Bros. is hopeful that the greater reliance on house brands by the grocery chains, combined with slowing sales rates for national brands, will force the big food makers to reverse course.

“When a name brand wants to play ball and lower prices, they will find that we will be the best friend they have ever had,” Brown said. And he thinks that will pay off for the national brands, his stores and shoppers. “I really believe that if you take care of a customer, the customer will take care of you.”