Retailers, who begrudgingly went along when food makers pushed up prices to recoup record-high costs, are flexing newfound muscle and demanding price cuts to match the recent steep retreat in ingredient costs.
Food makers are resisting, saying the uncertain economy and volatile costs make price cuts unwise. But retailers aren’t backing down.
Consumers — who responded by favoring grocers’ in-house products over national brands and by shopping at discounters — may end up with fewer choices.
“We don’t have to carry three brands,” Costco Wholesale Corp.’s Chief Financial Officer Richard Galanti told investors earlier this month. “We can choose between brands that are going to be more aggressive, that help us help our members.”
Costco has been lowering its prices, Galanti said, and is prepared to sacrifice profit margins and cut national brands that won’t negotiate on pricing — if that drives sales. “We are not the only ones out there pressuring manufacturers,” he said.
Steven Burd, president of grocery chain Safeway Inc., recently told investors that it has gotten some vendors to roll back their prices. Like many retailers, it is finding its new strength in its in-house brands, including Safeway Select, O organics and Primo Taglio deli products.
“We’re going to chew them up on corporate brands,” Burd said of food makers that don’t lower prices.
The situation grew so tense last month that grocer Delhaize SA in Belgium said it would no longer stock at least 250 Unilever products because the food maker was making “unprecedented” demands that would force retail prices up 30 percent.
The grocer, which operates Food Lion and Sweetbay stores in the U.S., said Unilever was demanding it carry some products consumers did not want. The two companies apparently reached an agreement this month, though the terms are unclear.
Food makers, which raised prices last year after fuel and some ingredient costs hit record highs in the summer, are leery of dropping their prices in case commodity costs come back up and pinch their profit margins. They say they’re still catching up with last year’s costs, even as they confront tougher competition from retailers.
Food company changes
Producers are making some changes that can provide relief to both consumers and retailers, said Frank Luby, a partner with Simon-Kucher and Partners who consults with companies on pricing.
Some are changing package sizes, often shrinking them while keeping prices steady so shoppers don’t pay more. But this tactic can make them targets of their competitors — as ice cream maker Haagen-Dazs learned when it announced recently that it will shrink some of its containers.
Rival Ben & Jerry’s, owned by Unilever, said on its Web site — without naming Haagen-Dazs outright — that consumers are hurting like food makers and they deserve a full pint of ice cream, not just 14 ounces.
Kroger Co., owner of Dillons, Fred Meyer, Food 4 Less and other chains in 31 states, saw sales of its in-house brands hit a record 27 percent of total sales in the most recent quarter.
The company’s CEO, David Dillon, said after its most recent earnings report that Kroger is pushing producers back on prices. But he also said high pricing of national brands is helping bring customers to store brands — “so we are quite happy in either scenario.”
Some 64 percent of shoppers in 2008 said they often or always buy a store brand rather than a national one, according to the Food Marketing Institute, an industry trade group. That’s up from 59 percent the prior year.