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Packaged food companies find ways to maintain quality and save money

BY Jim Wright

NEW YORK Packaged food companies, pressured to shore up profits squeezed by soaring commodity costs, are finding unique ways to save on costs. General Mills, for example, in recent months, reduced the number of pretzel shapes in its Chex and other snack mixes to three, from 14. But research found that consumers cared more about the variety of pretzel flavors than shapes. That move, combined with other manufacturing improvements, is saving the division more than $1 million a year.

In a similar vein, Minneapolis-based General Mills cut in half the number of pasta shapes it uses in Hamburger Helper, to 10. Food engineers and marketers even worked on the pasta bits so they nested together, enabling the company to shrink the box, reducing the cost of raw materials by 10 percent. Chief Executive officer Ken Powell says General Mills had no choice. “With commodity prices increasing, we needed to think about how we generate productivity in a more powerful way.”

Cost savings are a big issue for the food companies that gathered for the Consumer Analyst Group of New York annual conference Feb. 19-22 in Boca Raton, Fla. Globalization—the rise of consumer incomes in India and China, in particular—is pushing up demand for all sorts of commodities, including such foodstuffs as wheat, corn and dairy products. The price of wheat, for example, has doubled in the past year and is at an all-time high.

Meanwhile, the push for alternative energy sources is leading some farmers to divert corn to that use, and creating spot shortages of such grains as soybeans, as farmers divert acreage to the more lucrative crop, a trend that industry experts say likely won’t change in the foreseeable future.

Food companies are passing along much of their higher costs to consumers, in the form of price hikes or smaller packages. Sara Lee has raised bread prices four times in the past year and a half, and expects another increase before the end of June, says chief executive officer Brenda Barnes. At General Mills, price increases accounted for two to three percentage points of the company’s first-half sales gain of 7 percent.

So far, consumers have been willing to pay the higher costs, because the overall price of a full shopping cart is less than eating out. Still, food companies are feeling the pinch. As a group, their stocks are down about 11 percent since Dec. 1, according to UBS Securities.

So the 25 chief executives who gave presentations in Boca Raton went to some lengths to assure analysts they can pare costs from their operations and meet profit expectations. On Feb. 20, for instance, Kellogg’s chief executive officer David Mackay confirmed the company expects to deliver earnings for the current year of $2.92 to $2.97 per share—roughly in line with the $2.99 expected by 16 analysts surveyed by Bloomberg Financial Markets—through a mix of brand building, new products, price increases, and productivity gains.

That last part—finding cost savings without compromising quality—is where companies often get the most creative. ConAgra expects to save $20 million in annual costs by reducing the number of can sizes to 20, from 100, over two years, for everything from Hunt’s tomato sauce to VanKamp beans. That initiative is part of a larger drive for $225 million in cost savings in the company’s 2009 fiscal year. ConAgra has been viewed by analysts as a laggard in the consumer-products field, but chief executive officer Gary Rodkin told analysts that earnings for the second half of its fiscal year will be higher than the previously estimated 70 cents per share.

General Mills has outperformed many of its beleaguered peers in part by rolling out new, higher-margin products such as Progresso light soups and good-for-you snack bars. On Feb. 19 the company raised its earnings outlook for its fiscal year, ending in May, to a range of $3.64 to $3.66 per share, up from a range of $3.39 to $3.43. That’s an increase from the $3.18 per share—and $1.14 billion total—General Mills earned in fiscal 2007. Analysts expect sales to rise 6.4 percent this year, to $13.2 billion.

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Snack packs fall below 100 calories

BY Jim Wright

NEW YORK There’s a new magic number in portion-control land: 90.Also 80. And 70. Or even 60.

Packaged-food giants have discovered that calorie-conscious snackers who turned 100-calorie packs into a $200 million annual gold mine are getting bored with 100. So the bar is falling.

Quaker is making 90 the new 100, as it rolls out a string of 90-calorie treats.

The products are Quaker’s fastest-growing line, says Quaker Foods president Mark Schiller. “What I like most about 90 is that it one-ups 100.”

In 2007, 82 single-serve products touting fewer than 100 calories hit the market vs. seven in 2003, says Tom Vierhile, director of Datamonitor’s Productscan Online. “You sound like you’re a consumer advocate by ratcheting down the number of calories, but all you’re doing is helping your bottom line.”

Quaker, for example has introduced 11 single-serve products at 90 calories since 2007. Last month, it rolled out three Mini Delights and two granola bars.

Kelloggs “bull’s-eye” for snack packs is still 100 calories, but consumers will see “continued growth of portion-control packs” of all sizes, says Michael Allen, senior vice president of snacks.

With new Special K Bliss bars at 90 calories and Grab ‘n Go cereal packs as low as 70, Kellogg sells 150 portioned snacks.

New from ConAgra are Hunt’s Snack Pack Fat Free Pudding at 80 calories and David Seeds Pumpkin Seeds at 90.

Kraft just rolled out LiveActive Natural Mozzarella Cheese Snacks in 80-calorie sticks. Its Jet-Puffed marshmallows are sold in 90-calorie pouches.

General Mills is introducing Fiber One yogurt from Yoplait, with 80 calories.

Hershey’s low-cal offer: 60-calorie Hershey Sticks come in four flavors.

From Del Monte Pet Products, there are Pup-Peroni 50-calorie packs.

They’re a “guilt-free” snack, says Matthew Park, Del Monte’s marketing vice president. Just as 100-calorie packs help people, he says, 50-calorie packs help dogs cut calories and live “healthier.”

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Nestle expected to release record sales results

BY Jim Wright

ZURICH , Switzerland Despite rising costs for such ingredients as flour and milk, Nestle is expected to break sales records when it releases results on Thursday. Markets will be seeking assurances that a push by the world’s largest food group, into healthy foods and strong name brands will pay off, as global economic growth cools, but food inflation stays hot.

“Nestle has a well-balanced portfolio where its brand diversity means that there is no major reliance on a few key categories and slower-performing brands are offset by strong performers,” Bear Stearns analysts said in a note. “We expect Nestle’s high brand density to continue to increase going forward due to the strength and growth profile of its big brands.”

Nestle, which makes Nescafe coffee and KitKat chocolate bars, has managed to increase profits and profitability despite record prices for key food inputs such milk and cocoa.

Nestle’s strong brands, which include Buitoni pasta, Maggi soups and Friskies cat food, are expected to command loyalty from consumers in rich countries. But rising prices for food in developing markets may be approaching the point where some consumers retreat, experts say.

Investors will also look for any indications Nestle aims to sell its 75 percent stake in U.S. contact lens company Alcon or its 29 percent stake in French cosmetics group L’Oreal. The Alcon stake has a market value of about $34 billion, and the L’Oreal stake about $22 billion.

Nestle is seen posting an 11 percent increase in net profit to 10.22 billion Swiss francs ($9.33 billion), according to the average of a Reuters poll of 14 analysts. It is also expected to break the 100-billion-franc barrier for the first time with annual sales of 107 billion, the poll showed.

Nestle chief executive officer Peter Brabeck has said the group will reach its organic sales growth target of 5 to 6 percent in 2008.

Brabeck, who will pass the chief executive officer baton to Paul Bulcke later this year and remain as chairman, has said the group has the wherewithal to weather an economic slowdown in the United States, where Nestle generates around 30 percent of its profit.

Analysts see food groups’ pricing power—their ability to raise prices without killing demand—as perhaps the single best indicator of how they will fare in an environment of unprecedented food inflation.

In general, the weaker the brand name and customer loyalty to that brand, the more difficult it is to raise prices.

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