Food Companies: Recipes for Tough Times

From soup to nuts, these are difficult times for food manufacturers. Spikes in energy prices have pushed up the costs of plastic packaging and transportation, while unprecedented surges in corn and wheat prices have also taken a toll on profits. On the other side are cash-strapped consumers who are reining in spending or switching to cheaper private-label foods in an effort to stretch their paychecks.

Having already teased out costs through greater automation, shrinking inventory, and tighter logistics, manufacturers are now looking for new ways to improve, or just preserve, profit margins. Although they have no choice but to pass on higher costs to customers, they are now able to do it in smarter ways—by raising prices on only the least price-sensitive items instead of whole product lines or tailoring prices to various levels of demand in local markets, for example. Foodmakers are also tweaking product presentation and packaging in an effort to boost sales volumes.

The weakened U.S. economy has actually created one benefit for the industry: a consumer shift to home-prepared meals and away from dining out. That's boosting demand for a wider range of specialty ingredients in stores as consumers try to add some restaurant-style pizzazz to home-cooked meals.

A Return to Home Cooking

Stephen Sibert, manager of the industry affairs group at the Grocery Manufacturers of America, a consortium of food manufacturers, cites a rise in consumer buying of ingredients as opposed to prepared foods. "There's a real opportunity for retailers and manufacturers to work together to bring that consumer back to the kitchen or back to the pantry, and get that consumer's confidence up again for preparing a multicourse dinner," Sibert says.

Based on feedback from its more frequent consumer research studies, Campbell Soup (CPB) is creating recipes that include 5 to 10 high-quality ingredients for easy-to-make, nutritional, and low-cost meals, says Mike Salzberg, president of its Campbell Sales subsidiary. Campbell is also doing more to educate consumers about the nutritional value of its V-8 and V-8 V-Fusion fruit-and-vegetable juices. And by working with retailers to reorganize store shelves so shoppers can easily distinguish 100% juices from those with less nutritional value, Campbell is seeing sales rise where they were flat in prior years.

"When…[consumers] understand more, they tend to purchase more, vs. getting frustrated and not buying at all," says Salzberg.

In an environment where higher prices are unavoidable, another trend has been to back up price hikes by offering a higher-quality product that stands apart from its broader food category, such as cereals or packaged cheese—a product that warrants a premium price in consumers' eyes. That's becoming easier as consumers' preference for specialty and organic foods grows.

High-Margin Organic Foods

Bill Bishop, a principal at Willard Bishop Consulting, a Chicago firm that advises food manufacturers, sees a growing trend to add value to what are basically commodity products based on higher quality that can command higher prices. "If I'm the only guy who makes what you want and you need it to satisfy the needs of your customers, we're going to have a different price conversation than the other 10 [suppliers waiting] in line," he says. Kraft Foods' (KFT) 2% Milk Natural Cheese, made without added growth hormones, and its high-fiber and protein-rich products under the South Beach Living brand are examples of this approach.

Another potential windfall from offering higher-quality, differentiated products: the chance to grab a piece of the lucrative Gen Y market, which has shown a bigger appetite for specialty, ethnic, and natural foods, according to Experian Research Services in New York.

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