Food Companies Face Tough Call on Prices

NEW YORK — Soaring commodity prices are pushing food companies to make some tough decisions.
 
A sharp climb in costs for wheat, dairy and crude oil has forced firms ranging from cereal companies to cheese makers to hike their prices. But while the higher prices have helped keep profits robust, they also run the risk of forcing consumers to buy less or to look for better bargains.

Makers of that consumer staple — cereal — have been pushing their prices higher to bolster earnings, but at least one measure points to a drop in volumes of ready-to-eat cereal over the last year in many stores.

Cereal companies have been successful in raising prices, but they may be "forcing their core consumer to other options," said Burt Flickinger, managing director of Strategic Resource Group, a food-industry consulting firm in New York. Those options could include anything from a fast-food breakfast to frozen offerings, he said.

Data from research firm Information Resources Inc. show that the sales volume of ready-to-eat cereals fell 1.9 percent for the year ended Aug. 12 compared with a year earlier.

While those data may have their limitations — they track U.S. supermarkets, drugstores, and mass-merchandise outlets but exclude behemoth Wal-Mart Stores — they also shine a light on the tightrope food companies must walk as they look to offset commodity pressures with higher prices.

For the last 12 months, prices for cereal and cereal products were up about 3.8 percent, according to the Labor Department's consumer price index. According to the IRI data, Kellogg saw its ready-to-eat cereal volume sales fall about 4 percent for the last 52 weeks. Kraft Foods’ Post cereals had a 1.2 percent decline, General Mills saw volumes climb 0.57 percent, while private label companies experienced a 2.9 percent pullback.

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