Eat, Drink and Be Wary? - Analyst Blog

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Spiked food prices are threatening to dampen the holiday spirit.

According to the U.S. Labor Department, grocery store prices peaked 5.9% in November compared with the same month a year ago. The food marketplace remains clouded with continuing inflationary pressures as US food companies continue to wrestle with high costs of raw ingredients. The sluggish business condition for frozen desserts, bakery items, pizza, frozen products, soup, noodles, etc. has raised concerns for quite some time.

The Industry Loses Pace

In the U.S., consumers spend approximately $1 trillion annually on food, or nearly 10% of the Gross Domestic Product ( GDP ). Within the food "pie," packaged food comprises a chunk of 31%. But, the recent trends of rising food prices have affected consumption demand.

Facts substantiate that the effect of food industry deceleration has not only been confined to the Food Making business and its consumers but percolated down to the supply chain, affecting retail distributors, raw material suppliers and farmers, to name only a few.

Where It All Started

In hindsight, consumption of frozen packaged foods remained relatively stable even during the recession in 2010, as consumers resorted to having frozen food at home, which is a cheaper alternative than visiting restaurants. The US frozen processed food market was estimated close to $30 billion in 2010. However, the Packaged Food industry, both fresh and frozen, started slowing down in the aftermath of the recession. Given the high raw material prices, the sluggish trend has continued since then.

Dismal Trends

ConAgra Foods Inc. ( CAG ) and General Mills Inc. ( GIS ), two of the largest US consumer packaged foods companies by revenues, reported a fall in net income, in the second quarter 2012, in spite of rising sales. Net income at ConAgra, makers of brands like Slim Jim and Chef Boyardee, fell 13.4% year on year to $174.7 million, or 41 cents a share, despite an 8.1% rise in sales to $3.4 billion.

Operating profits from consumer foods segments declined. General Mills reported a 27.5% fall in its second quarter net income. Evidently, the higher input costs exerted pressure on profit margins. However, net sales were up 13.7% y/y to $4.6 billion.

Jennie-O Turkey brand's Hormel Foods Corporation ( HRL ) posted financial results for the fourth quarter and fiscal 2011 with an EPS of 43 cents, down 4% from 45 cents in the prior-year period. Net sales however rose 2% to $2,103.9 million.

The Aperitif

The projected US inflation in 2012 -- a rate fairly above 2% -- remain a concern. The estimated price rise, especially in the Packaged Food industry, indicates that the food and beverage market growth will trail that of the overall U.S. economy. However, the shoppers are anticipating a rebound in their personal finances with the optimism to return to the lifestyle of the pre-recession levels.

We believe that the economy would improve and the U.S. food and beverage market would revive in 2012, shored up by reinvigorated consumer demand.

CONAGRA FOODS ( CAG ): Free Stock Analysis Report

GENL MILLS ( GIS ): Free Stock Analysis Report

HORMEL FOODS CP ( HRL ): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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