U.S. consumers may pass on convenience and organic foods

CHICAGO/LOS ANGELES Wed Aug 27, 2008 4:47pm EDT

CHICAGO/LOS ANGELES (Reuters) - Cash-strapped U.S. consumers could be turning their backs on two of the biggest trends in the food business -- organics and convenience -- in order to save money.

Food industry executives and analysts interviewed in the past week pointed to those two categories as among the most vulnerable to consumers trying to stretch food budgets. While cash-strapped consumers may be eating more at home, they are also cutting out some of the little time-saving or health- conscious luxuries to which they had grown accustomed.

These changes could be a boon to companies such as Kraft Foods Inc, General Mills Inc and J.M. Smucker Co, whose products are seen as building blocks to home- made lunches and dinners.

But forays by food producers such as Chiquita Brands International Inc and by supermarket chains such as Whole Foods Market Inc and Safeway Inc to sell pre-cut packages of fresh fruits and vegetables or prepared meals at a premium could be among the casualties.

"When the $75 doesn't buy what it used to buy, you change what you buy," said Bob Goldin, executive vice president at food and restaurant industry consulting firm Technomic. "Consumers really are willing to sacrifice convenience to manage their budgets."

Demand for organic milk and meat remains strong, while purchases of packaged organic products such as crackers have dropped off, said Laurie Demeritt, president of market research firm Hartman Group in Bellevue, Washington.

According to the Organic Trade Association, sales of organic products, including food and nonfood, were estimated to have risen 19.8 percent to $21.2 billion in 2007 from 2006, with the increase slowing to 17.9 percent in 2008. Sales rose 21 percent in 2006 from 2005.

"Leveling off occurred much more quickly than people anticipated as a result of the economy," said Brian Morgan, senior research analyst at Euromonitor, noting that areas such as organic produce have seen slower growth.

It has also become more difficult to attract new customers to organic products, he said.

Stonyfield Farms, the leading U.S. organic yogurt maker, said the pace of revenue growth has slowed for the company along with the economy.

"I would have expected a slowdown this year because of the price pressure that people are seeing," Gary Hirschberg, chief executive of Stonyfield, told Reuters.

But though the pace of growth has slowed, sales are not actually falling, he said.

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Food prices were up 6 percent in July from a year earlier, according to the Labor Department's consumer price index. Food makers, struggling with soaring costs for grains, energy and other commodities, have repeatedly raised prices in the past several quarters after years of stable prices.

That has put pressure on consumers who are also being hammered by rising costs for gasoline and mortgage payments.

Meanwhile, according to a study by retail analytics firm Precima, 50 percent of people surveyed said they would give up convenience foods such as frozen dinners when budgets were tight. The online survey was conducted for Precima in late June and included 2,048 U.S. consumers nationwide.

Data gathered by The Nielsen Co also show some signs that consumers are giving up convenience to save money.

Cookie mix sales volume rose 15.8 percent in the four weeks ended August 9, while ready-to-eat cookies and frozen cookie dough fell 18.1 percent. Frosting mixes rose 33 percent, while ready-to-spread frosting declined 0.7 percent.

That could help General Mills, which owns the Betty Crocker brand, and J.M. Smucker, which sells Pillsbury baking mixes.

Packaged heads of lettuce rose 3.9 percent, while pre-cut fresh salads fell 3.1 percent.

Kraft's Deli Selections lunch meats picked up 2 percentage points of market share in the second quarter, with that accelerating as consumers are making lunch at home and brining it to work, spokesman Mike Mitchell said.

The largest North American food company has also seen more sales of its Kool-Aid drink mix and is marketing it as a less expensive alternative to a bottle of soda, he said.

But getting a precise measure on convenience cutbacks is still tricky, analysts said. While one consumer might be giving up a premium frozen pizza in order to buy something less expensive, another consumer with a little more money might buy it instead as he or she trades down from a restaurant pizza.

"I still believe the restaurant trend is more dominant right now," Euromonitor's Morgan said.

That has helped support earnings at most U.S. food companies, many of which posted better-than-expected second- quarter results, despite fears soaring prices would force consumers to trade down to lower-priced options.

Some food companies, including Kraft and Hormel Foods Corp, also benefit from a broad portfolio of food products at different prices that should help insulate them from consumers giving up convenience to save money.

"It seems like a plausible thing that could occur," Hormel Chief Executive Jeff Ettinger said when asked if consumers might ditch prepared foods for items that take more time to turn into a meal. "But I don't see any evidence of it in our portfolio."

(Editing by Andre Grenon)

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