Food brands face price test

17 February 2011

PARIS: Some of Europe's biggest food manufacturers are facing tough decisions concerning whether to raise prices, or protect customers from rising commodity costs.

Danone, the French group, anticipates products like yoghurt and Evian might become more expensive for shoppers, reflecting fluctuations in the raw materials market.

However, Franck Riboud, the company's chief executive, suggested it would adopt a careful approach in this area, based on a recognition that many buyers are still seeking to save money.

"The mistake we can't make is to ask for more than consumers are willing to pay," he told the Wall Street Journal. "We have to stay competitive."

While the organisation believes the amount it spends on ingredients and packaging constituents could climb by between 6% and 9% in 2011, the price of goods in France will only grow by an estimated 2% or 2.5%.

One advantage Danone can leverage is its leading position in categories such as yoghurt, bottled water and baby food, fuelling demand among shoppers and thus enhancing its status with trade partners.

"Our ability to negotiate is much stronger," said Riboud.

Nestlé, headquartered in Switzerland, is confronting similar obstacles, but will avoid sweeping changes to its strategy by prioritising alternative tactics.

"Raising prices for the consumer is the last thing you do," said Paul Bulcke, the company's chief executive. "You have to play all your other cards first."

A potential option is identifying different ingredients, although even here Nestlé will be highly selective.

"You would not play around too much with replacing cocoa. If you have a quality product you don't mess around with that," said Bulcke.

Unilever, which owns Hellmann's and Knorr, is pursuing what it calls a "realistic" model, as part of a wider shift observable inside its core sectors.

"In our industry, we see a trend towards the more rational approach to moving prices up when cost pressures make it unavoidable, and we're starting to see them already in the marketplace as we talk," Paul Polman, Unilever's ceo, argued.

"We aim to protect our consumers as far as we can from the impact of higher costs. But in the current environment, a responsible thing to do is to price realistically and to act promptly in making any changes that are needed."

General Mills reported late last year that it was "very encouraged" by its European performance, where the UK, in particular, is providing a stern test.

"You have ... a very challenging macroeconomic environment in the UK. And it's very difficult there right now," said chief executive Ken Powell. "That has lead to an intensely promotional environment across a lot of categories."

"As we move on to an economic recovery, albeit we think it will be slow, we think that those trends will moderate. But right now, it's just very promotional there across many categories. And we are feeling that."

Data sourced from Wall Street Journal/Seeking Alpha; additional content by Warc staff