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The Companies Profiting From America’s Food Fight

Oil… gasoline… utility bills… food. You name it, prices for everyday items are soaring across the board.

Food manufacturer General Mills (NYSE: GIS) became the latest firm to break bad news on March 23 when it announced a further hike to its prices. What’s more, the company expects faster increases this year, due to rising costs of ingredients like corn and wheat.

CEO Ken Powell said it’s a necessary evil. “And I think that our retail partners understand that,” he added.

Maybe so. But what about consumers?

Granted, inflation is a global issue. But for families, record-high food prices are pushing budgets to the limit, particularly with the poor job market. Already, a 14-oz box of Cheerios checks in at $4.50 – 50% more than what it cost 10 years ago. And the price could easily climb past $5 before the end of the year.

But there is a bright spot – for consumers and investors alike…

Private Label Brands Provide an Alternative to $5 Cereal

According to Richard Shea of Shea Marketing, more than 65% of cereal sales are made with a coupon or in-store special. But in the same way as analysts speculate that $5 gasoline will prove to be the breaking point for many drivers, these “buy-one-get-one-free” deals could lose their appeal if cereal products breach the $5 level.

So far General Mills has encountered little consumer resistance, largely due to its strong brand recognition. And with the exception of Kellogg (NYSE: K), it’s also faced little competition.

But that’s changing.

Generic brands are stealing some of the giants’ glory. Take Missouri-based Ralcorp Inc. (NYSE: RAH), for example. It offers more than 35 national brand imitations. And in the most recent quarter, the company saw sales its store-brand cereals segment rise by 5% to $204.7 million.

Meanwhile, General Mills’ cereal segment fell 6%. And this is just a sign of the times…

General Mills Walks the Line

Generally speaking, when a company needs to raise its prices, it’s better off doing so slowly and incrementally.

Why? Because higher prices often lead to falling sales – a situation that arose in 2009 when higher cigarette taxes triggered an 8% sales drop. The downtrend continued last year, too, as sales fell another 6%.

Tell that to General Mills, though, whose recent price hike came just six months after it last raised prices. That doesn’t bode well for the company, with a recent Bloomberg study finding that most consumers already feel that they’re paying too much for staple food items like cereal.

In addition, Morningstar analyst Erin Swanson says this will make “weaning [consumers] off lower prices” difficult.

General Mills is walking a fine line here. If it oversteps, its sales – and shares – could take a hit. But at the same time, it would give a boost to generic brand manufacturers like Ralcorp.

Good investing,

Alexander Moschina