Food firms say "Let's Get Small" in passing on costs

CHICAGO (Reuters) - Consumers are seeing their grocery bills rise, but what they may not have noticed just yet -- and what they will be seeing even more of -- is that their hard-earned cash will be getting them less and less of their favorite products.

As author and comedian Steve Martin said during his stand-up days -- "Let's get small ... real small."

Most food companies have raised prices over the last year to offset unprecedented spikes in costs of key ingredients like milk, grains, cooking oil, coffee and cocoa, due in part to growing global demand and the push to turn corn into ethanol.

The food portion of the U.S. Consumer Price Index, the most broadly used gauge of inflation, rose 0.4 percent in February after a 0.7-percent jump in January. Labor Department officials had said the January rise was the largest since a matching gain in February last year.

But as consumers juggle these increases with lower home values, job uncertainty, gasoline exceeding $3 a gallon, and a looming recession, they are likely to begin trading down to cheaper private-label brands, according to Robert Goldin, executive vice president at Technomic, a food and restaurant research and consulting firm.

"I think consumers are going to be near a breaking point on a lot of these," Goldin said.

Aside from "real price increases," Goldin said he expects "stealth price increases," such as cutting the weight of food packages while keeping the price unchanged, or switching to lower-cost ingredients without telling consumers.

While food company executives gathered this week for the Reuters Food Summit in Chicago did not admit to "lowering the quality" of their products, many said that "weight-outs" were nothing new.

ConAgra Foods Inc (CAG.N) Chief Executive Gary Rodkin said the company looks to reduce the weight of some products as long as it doesn't impact consumers' experience.

"We're considering taking kernels out of each bag (of our Act II microwave popcorn) to enable us to not raise the price more than we have to," Rodkin said. While that change is in progress with Act II, Rodkin said ConAgra was not doing the same with its more expensive Orville Redenbacher's brand.

Meanwhile, Unilever PLC (ULVR.L) has taken an ounce out of some margarine tubs it sells in the U.S. -- giving customers 15 ounces instead of 16 ounces -- but keeping prices the same.

The world's third largest food group has also reduced the number of flavor ingredients in its chicken bullion cubes, which has led to cost savings, according to Bauke Rouwers, Unilever's senior vice president of foods for its Americas region.

And General Mills Inc (GIS.N), known for breakfast cereals such as Cheerios and Wheaties, reduced the size of some cereal boxes, but Chief Executive Kendall Powell told Reuters that it was meant to bring its boxes and prices more in line with those of its competitors.

Over time, Kendall said the company's boxes had become bigger, and about 40 cents more expensive, on average, than its rivals' boxes.

"So we got the box size right and the retail prices much more in the competitive zone. That has been a very effective strategy for us," Powell said, adding that it was an unusual move for the company, but one it could use periodically.

Rival Kraft Foods Inc (KFT.N) has also downsized some of its cereals, which include Raisin Bran and Shredded Wheat, in keeping with industry practices, said Richard Searer, its president of North America, but it has no plans to repeat the strategy, or change the ingredients, in other areas.

"On the quality front, I can tell you definitively we are not looking at any of that. Even in a tough environment like this, delivering value to consumers is critical," Searer said.

QUALITY SELLS

While tough times are forcing companies to get creative with ways to preserve their profit margins, sacrificing quality is not often on the menu.

"In an environment where the consumer clearly is going to come under pressure from commodity costs, we have to look at ways to increase prices intelligently," said Nigel Travis, chief executive of pizza chain operator Papa John's International Inc (PZZA.O).

Travis said that meant pushing specialty, multi-topping pizzas and getting consumers to use online ordering, which often results in larger checks, since the whole menu is visible.

While Pizza Hut, owned by Yum Brands Inc (YUM.N), has introduced a value-priced "Pizza Mia," with fewer toppings and less cheese, in reaction to the weak economy, Travis said Papa John's would not go down that road.

"We believe our quality position would not allow us to be accepted by taking toppings and ingredients out of our pizza," Travis said.

Pizza Hut spokesman Chris Fuller said the Pizza Mia is now a permanent fixture on its menu, and that at $6.99 -- or $5 when purchasing three or more pizzas -- it is a good choice for feeding large groups, not just during tough economic times.

Domino's Pizza Inc (DPZ.N), which offers three medium one-topping pizzas for $5 each, also said it would not take ingredients out of its pizza or reduce its size.

J. Patrick Doyle, president of the company's U.S. business said: "We just don't think that's a game we want to play. We want our product to be our product."

(For summit blog: summitnotebook.reuters.com/)

(Editing by Phil Berlowitz)