Consumers may be returning to grocery stores but they are not racing for name-brand products, foodmakers Kraft Foods Inc. and Sara Lee Corp. said as they released their latest quarterly results Wednesday.
Both companies lowered their forecasts for the current and upcoming quarters due to weakness overseas and a rising U.S. dollar.
Kraft said it saw unit volume slip in its U.S. beverage, cheese and snack nuts businesses, as it raised prices to offset higher input costs, and Sara Lee said it sold fewer deli and frozen bakery products.
To save money, consumers have been turning to private-label products that many grocery stores offer, said Christopher Shanahan, a research analyst with Frost & Sullivan. And as the recession lengthens, and layoffs and wage freezes mount, consumers are finding these typically less expensive brands increasingly attractive.
"Income is basically not growing at the same rate as food prices and food budgets," he said. "So now consumers are getting smarter. They're increasingly considering private label and exploiting savings and cutting coupons."
Shanahan said private label products have sold better in Europe than the U.S. for many years because European consumers trust them more. But that is changing.
"I think the U.S. is quickly catching on," he said.
Kraft, the Northfield, Ill.-based maker of Velveeta, Oreo cookies, Planters snack nuts and Maxwell House coffees, said its overall unit volume fell 5.2 percent in its fourth quarter, which ended in December. Sara Lee said unit volumes fell 2.5 percent in one of its biggest segments — North American retail — in its second quarter, which also ended in December.
Kraft Chief Executive Irene Rosenfeld said the company is keeping pricing in line with increasing ingredient costs, and higher prices contributed 9.8 percentage points of Kraft's growth in the quarter.
Higher prices pushed unit volume down in categories like cheese, but Rosenfeld said Kraft doesn't see that as a long-term trend.
"In the short term we certainly saw an impact because of the aggressiveness of the pricing actions we took," she told The Associated Press in an interview Wednesday. "As we go forward, we expect that to moderate because of the investments we've made in our brand franchises."
Sales of well-known Kraft macaroni and cheese mix and of pizza in the DiGiorno and California Pizza Kitchen lines rose as consumers deserted restaurants for grocery stores, she said.
Also hurting volume for both companies were retailers' trims to their inventory as they, like consumers, try to limit their spending. Sara Lee Chief Executive Brenda Barnes told analysts on a conference that the company wasn't seeing such drops with its namesake breads, for example, because those products already have short shelf lives. But she said overseas retailers were cutting their inventory of the company's household and body care products.
Household and body care were hurt both as the economic crisis deepened in Europe and the U.S. dollar gained strength, which dampened sales overseas. International household and body care sales dropped 15.7 percent to $490 million, with unit volumes down 3.2 percent.
But Sara Lee's international bakery revenue also plummeted, falling 16.4 percent to $196 million with an 11.2 percent drop in unit volumes, excluding one-time events.
Barnes said European shoppers, like Americans, are now increasingly reaching for private label brands, but she said her company's brands are still doing well.
"We've seen some slight changes in consumer behavior in a little bit of private label going up in some categories," she said. "But for the most part, brands are holding up quite well and strong and sustaining the marketplace."
The lowered outlooks sent the two companies' stock tumbling.
Shares of Kraft fell $2.63, or 9.2 percent, to close at $26.11 Wednesday, while shares of Sara Lee fell 75 cents, or 7 percent, to close at $9.68.
Kraft's shares fell further on news that its fourth-quarter profit fell 72 percent due to costs related to a restructuring program. Excluding one-time costs and an adjustment on a gain from splitting off Post cereals, net income was 43 cents per share.
Analysts polled by Thomson Reuters, who typically exclude one-time items, had expected a penny more, 44 cents per share, on average. Kraft's revenue rose 6 percent in the quarter to $10.77 billion, short of the $11.29 billion analysts predicted.
Kraft cut its 2009 guidance because of the stronger dollar and pension costs to $1.88 per share from $2 per share. It said its earnings will improve if the U.S. dollar weakens, but it now expects revenue to grow about 3 percent compared with 2008, down from a previous forecast of 4 percent.
Sara Lee also cut its guidance and now expects full-year 2009 earnings between 72 cents and 79 cents per share, down from 99 cents to $1.06 per share, which it forecast in November. Analysts predict the company will earn 81 cents a share.
For the quarter, Sara Lee lost $17 million, largely due to a write-down related to its North American foodservice beverage unit. The loss amounted to 2 cents per share for the quarter, down from profit of $182 million, or 25 cents per share, a year ago.
Excluding one-time items, the company earned 21 cents a share, in line with analyst estimates. Its revenue fell to $3.34 billion from $3.41 billion a year earlier.
AP Business Writers Mae Anderson and Michelle Chapman contributed to this report from New York.
Source: AP News