Food makers Kellogg, Sara Lee hit on pricing worry

By Brad Dorfman

CHICAGO (BestGrowthStock) – Concerns that food makers would overdo price cuts to lure cautious consumers weighed on Kellogg Co and Sara Lee, even though both forecast better-than-expected 2010 earnings.

Cost-cutting measures helped Sara Lee post quarterly profit that beat analysts’ estimates, while analysts said Kellogg missed estimates due to higher-than-expected interest costs for debt refinancing and a drop in profit in its international business.

Kellogg shares were down more than 4 percent on Thursday afternoon, while Sara Lee shares dipped 0.4 percent.

Falling prices for some commodities have helped food makers cut prices and offer one-time promotions. But as unemployment remains high and consumers turn to lower-priced store brands to save money, analysts are concerned that manufacturers are risking profits to chase sales volume.

“Even though commodity costs have moderated, I don’t know if the level of moderation has warranted the price declines that were passed through,” Morningstar analyst Erin Swanson said.

Kellogg CEO David Mackay also noted that costs for some commodities, including sugar, are up sharply and that the company expects its commodity costs to rise 3 percent.

“Discounting to try to drive your volume is a means to profitless prosperity,” Mackay said in an interview with Reuters.

He expects industry pricing to remain stable in 2010, though he acknowledged that promotional spending — which consumers see as special price deals in the store — increased in the second half of 2009 and will likely continue in 2010.


Morningstar’s Swanson noted that Hellmann’s mayonnaise and Knorr soup maker Unilever slashed prices, though it saw a large increase in the volume of products sold. Unilever also faces stiff competition on the personal care products side of its business from rivals such as Procter & Gamble Co.

“We expect the environment for our business in 2010 to continue to be tough … Unemployment will continue to stay high and consumer confidence is likely to remain low,” Unilever CEO Paul Polman told investors at a presentation after the company posted a 7 percent drop in 2009 underlying earnings. Unilever shares were down 3.7 percent.

The bread market, which includes Sara Lee and rival Flowers Foods, is another area where consumers are seeing lower prices.

“I think bakery is probably just a little intense right now in terms of how much the prices have dropped,” Sara Lee CEO Brenda Barnes said in an interview.

Flowers, meanwhile, said it expects the competitive environment to remain heavily promotional in 2010, and its shares were down more than 2 percent.


Kellogg, the maker of Rice Krispies cereal and Keebler cookies, said profit was $176 million, or 46 cents a share, for the fourth quarter. Analysts on average forecast 49 cents a share, according to Thomson Reuters I/B/E/S.

Sales fell 1 percent to $2.9 billion, just below the consensus analysts’ estimate of $2.94 billion.

Profit in the international business was down 23 percent, as the company spent more on advertising and other costs to try to drive sales. Volume fell 5.7 percent in Latin America and 9 percent in Asia.

Kellogg forecast 2010 earnings of $3.51 to $3.57 a share on a currency-neutral basis. Analysts had forecast $3.18 a share.

Sara Lee, which makes Hillshire Farm deli meats and Sara Lee bread, had profit of 28 cents a share excluding discontinued operations and other items. That compares with analysts’ expectations of 23 cents a share.

Sara Lee, long an industry laggard, has recently been reaping the benefits of a strategy to cut costs, sell off noncore brands and focus on food and beverages.

The company said it will disclose plans later this month for using proceeds from the pending $1.87 billion sale of its personal care business and the $475 million sale of its air-freshener business.

Sara Lee forecast 2010 earnings before items of $1.00 to $1.05 a share, while analysts on average forecast 95 cents a share.

Sara Lee’s baking competitor, Flowers Foods, posted profit of $31.8 million, or 33 cents a share, down slightly from a year earlier. Analysts on average forecast 34 cents a share.

Flowers stood by its forecast of a 10 to 15 percent increase in 2010 earnings. That would put earnings at $1.55 to $1.62 a share. Analysts on average forecast $1.55 a share.

Stock Report

(Additional reporting by David Jones in London, Mihir Dalal in Bangalore)

(Reporting by Brad Dorfman, editing by Dave Zimmerman and Matthew Lewis)

Food makers Kellogg, Sara Lee hit on pricing worry