The Wall Street Journal-20080131-High Food-Ingredient Costs Take Toll on Kraft- Kellogg

Return to: The_Wall_Street_Journal-20080131

High Food-Ingredient Costs Take Toll on Kraft, Kellogg

Full Text (392  words)

Kraft Foods Inc. and Kellogg Co. posted lower fourth-quarter profits and became the latest U.S. food titans to say they are facing increasing pressure from the high cost of dairy products, wheat and other ingredients.

Kraft said it will boost prices on most of its products to combat rising ingredient costs. Earlier this week, chocolate maker Hershey Co. and poultry sellers Tyson Foods Inc. and Pilgrim's Pride Corp. said they planned to raise prices after higher commodity costs hurt results in the latest quarter. Kellogg had previously set plans to increase prices.

The manufacturers' price increases, which are generally passed along to food shoppers by retailers, will further squeeze U.S. consumers. Americans already are battling the biggest jump in food prices since 1990, along with high fuel prices and a slowing economy.

Food costs are rising as emerging economies in Asia and elsewhere push up demand for meat and milk, which increases demand for grain to feed livestock. Meanwhile, demand for grain-derived ethanol has pushed up corn and soybean prices, as have rising transportation costs tied to the price of oil.

Kraft Chief Executive Irene Rosenfeld said the Northfield, Ill., company, which makes DiGiorno frozen pizza and Oscar Mayer deli meat, didn't raise prices enough in the fourth quarter to combat higher ingredient costs, particularly for cheese. "The biggest surprise was the unprecedented high dairy costs, and the fact that they remained at these high levels through year-end," she said in a conference call with analysts.

Earnings in Kraft's cheese and food-service segment fell 54%, excluding special items, as dairy costs jumped 40%. Ms. Rosenfeld said Kraft's sales volume may weaken in the current quarter as consumers adjust to significant price increases.

Kellogg, the Battle Creek, Mich., maker of Rice Krispies cereal and Eggo waffles, said North American earnings slid 11%, while European earnings jumped 44%. A change in distribution systems for Kashi Snacks and Kellogg's Fruit Snacks caused a 2% decline in North American retail snack sales.

Kellogg has been pouring more money into advertising to drive sales growth. Kellogg CEO David Mackay said in a conference call that the company has been increasing the price of its cereal globally by percentages ranging from the low-to-mid single digits. "We believe that commodities will generally remain on an upward trend," he said.

---

Anjali Cordeiro and John Flowers contributed to this article.