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At the register: Inflation hits grocery stores
Wednesday, November 16, 2005

Food prices are on the rise again.

Two major food makers said last week that they are increasing prices between 1 percent and nearly 4 percent on average for a range of packaged products such as crackers, licorice and frozen pizza. The moves appear to signal the start of the food industry's second round of broad price increases in less than two years, analysts say.

After keeping prices relatively stable for most of the past decade, packaged-food makers began pushing through price increases last year to cover rising costs for raw ingredients. Now, in a possible sign of inflation, some food makers say they have to raise prices even more because soaring fuel costs have made food delivery and plastic packaging more expensive.

Kraft Foods Inc., the nation's largest food maker, told retailers last week that it is raising the price of Oscar Mayer lunch meat, Capri Sun juice pouches, Wheat Thins crackers, Fig Newtons cookies and several other foods by an average of 3.9 percent. Hershey Co. also told stores last week that it is raising the price of Jolly Rancher candies and Twizzlers licorice bags by 1 percent. The increases, which began taking effect earlier this month, will be in place by the beginning of next year.

Flowers Foods, which makes Nature's Own and Sunbeam breads, said last week that it plans to raise prices as much as 5 percent at the beginning of next year, after raising prices in the fall. Analysts say other big food makers are likely to disclose price increases soon.

Yet making higher prices stick is another matter. As packaged foods get more expensive, consumers are increasingly shifting to cheaper "private label" products sold under grocery stores' own brands. Stores have sharply expanded their house-brand offerings during the past several years, and the makers of these goods have gotten better at mimicking big brand-name products. Through the seven years ended in 2004, sales of private-label goods grew at more than twice the rate of branded goods, according to ACNielsen.

Already this year, General Mills Inc. and Sara Lee Corp. have pulled back their price increases or offered temporary discounts after price increases on items like cereal and hot dogs significantly slowed sales. "The consumer is very smart," Brenda Barnes, chief executive of Sara Lee, said earlier this month. "They shop every day. They look for quality and they look for value."

To fight back, food makers have been trying to roll out more new products -- such as Kellogg Co.'s introduction of Vanilla Creme Frosted Mini-Wheats -- that make customers feel it is worth paying top dollar. Companies like Kellogg have been increasing their advertising spending with the hope that heavy marketing instead of temporary floods of coupons will protect their profit margins as costs soar.

But stiffer competition in the grocery industry is also making it harder to increase prices. After losing their grip on the grocery business to Wal-Mart Stores Inc., traditional grocery stores are more aggressively pushing back against food makers to slow price increases so they can stay competitive with new discount competitors.

Still, food companies say they have little choice. The cost of polyethylene, a key packaging ingredient, is up about 40 percent from last year, according to Eric Katzman, a food-industry analyst with Deutsche Bank. Kraft spokeswoman Kris Charles says the company's price increases "don't reflect the full impact of the cost increases we've experienced." Kraft's increase focused on items that require heavy packaging, like cups of refrigerated Jell-O pudding.

It isn't clear whether the latest price increases presage inflation in the economy as a whole. Consumer Price Index data, which cover national sales of an array of goods, don't yet reveal the rising prices. The food and beverage price index rose at an annual rate of 2.1 percent for the nine months that ended in September, a smaller increase than in the previous two years. But that index gets skewed by the price of commodity foods like fruits and vegetables and doesn't necessarily capture what packaged-food prices are doing.

"There hasn't really been any cost pressure in the food industry for over a decade," Mr. Katzman says. "This is the first period of time where you've had significant cost pressures where there's really no end in sight."

Many other industries -- including hotels, home appliances and car rentals -- are showing more pricing muscle after years of struggling to lift prices. While some food makers have managed to raise prices, others have struggled to push them through.

Jay Lybik, a 36-year-old economist who was buying food at a Chicago Walgreens store Tuesday, said he's started buying more store brands for items like spices, apple sauce and chicken broth. Still, the allure of brands is often enough to make him pay more for "the old faithfuls," including the bag of cherry Twizzlers he picked up Tuesday.

Food Prices On the Rise

Prices of Kraft Foods' Oscar Mayer lunch meat, Capri Sun juice pouches, Wheat Thins and Fig Newtons are rising 3.9 percent on average.

Prices of Hershey's Jolly Rancher candies and bags of Twizzlers are climbing 1 percent.

Bread maker Flowers Foods is increasing the prices of some bakery products.

The cost of polyethylene, a key packaging ingredient, is up about 40 percent from last year.

First published on November 16, 2005 at 12:00 am
Ilan Brat contributed to this article.