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By Lewis Krauskopf and Lisa Baertlein
NEW YORK/LOS ANGELES May 14 Rebecca Sumrow is
one of the customers food and restaurant company executives have
in mind when they consider raising prices to offset higher costs
as meat and milk soar to record highs.
The 30-year-old from San Clemente, California, was out of
work for a short time last year and saved money by moving in
with her boyfriend and cutting back on clothes shopping and
dining out. Though she now has a good job working for an
investment firm, she's maintaining her frugal ways.
Consumers "have gotten really good over these last four
years at stretching a penny," said Pat Conroy, leader of the
U.S. consumer products practice at Deloitte LLP. Referring to
the recession, he said, "Our hypothesis was that this thing was
going to leave a scar, not a bruise. So far, we've been right."
According to Deloitte's annual survey of food shoppers
released last week, 94 percent agreed they would remain cautious
and keep spending at the same level even if the economy
improves. That's about the same percentage as it was in 2010 in
the aftermath of the credit crisis.
So Chipotle Mexican Grill Inc, McDonald's Corp
, Hillshire Brands Co and Kraft Foods Group Inc
, all of which are raising prices, will be trying to
retain consumers stuck with stagnant incomes and unhappy
memories of the recession. Faced with little choice but to boost
prices to cover the spike in costs for products like milk and
meat, companies often are taking extra care to justify or soften
COLD CUTS AND BACON
Kraft has raised, or will soon increase, prices on about 45
percent of the products in its portfolio, including cheese, cold
cuts and bacon. Hillshire raised the prices on Jimmy Dean
sausage and Ball Park hot dogs as retail pork prices hit a
record high of $1.99 a pound in March, from $1.40 a pound a year
ago, according to the U.S. Department of Agriculture.
McDonald's eliminated its "dollar menu" last year to give it
flexibility to raise prices to offset high costs for meat and
Chipotle is one of the few companies expected to have the
power to raise prices due to its popularity with higher income
diners. The burrito chain is increasing menu prices this
quarter, but only after giving customers a benefit by removing
almost all food ingredients made with genetically modified
organisms, or GMOs.
"You're hearing that they want to, but the question always
becomes: Can it stick?" said Prudential Financial market
strategist Quincy Krosby, referring to raising prices. "What the
consumer has been very good about is going on strike."
That's happening now in the dairy aisle. As U.S. milk prices
go up, shoppers buy less, according to Dean Foods Co, the
largest U.S. milk processor. Fluid milk industry volumes fell
2.1 percent in the first quarter, according to Dean.
"There are certain price thresholds that we can't cross, or
it starts to impact the demand," Dean Chief Executive Gregg
Tanner said on a conference call with analysts last week. "We
experienced additional softness in our volumes during March and
The wholesale price for beverage milk was about $2.10 per
gallon in May, a record, and up 38 percent from a year ago,
according to dairy analyst Jerry Dryer. In March, retail milk
prices were up only 6.5 percent, suggesting that retailers are
eating much of the cost increase, he said.
U.S. consumer prices rose 1.5 percent in March from the year
earlier, led by food and housing rental costs. An index of
inflation tracked by the Federal Reserve is running even lower
at 1.2 percent, against the central bank's target of a 2 percent
Many consumers are still struggling in a tough labor market.
Labor force participation remains depressed. Private-sector
wages were unchanged in April and over the past 12 months have
averaged monthly increases of just 0.16 percent.
"There's still a large swath of the population that just
doesn't have the spending power," said Mark Luschini, chief
investment strategist at Janney Montgomery Scott.
Pricing issues already have changed the fortunes of Whole
Foods Market Inc and McDonald's, which are battling
rivals that emerged from the recession willing to start price
McDonald's raised prices late last year in a bid to protect
profits from higher meat costs. Its customers, who tend to earn
less than those who frequent Chipotle, voted with their feet and
U.S. sales at established restaurants have not posted a monthly
gain since October.
Whole Foods, the leading natural and organic grocer
nicknamed "Whole Paycheck" because of a perception among some
consumers of high prices, has seen same-store sales growth cool
as mainstream food sellers add more organics and undercut it on
Its most aggressive rival could be Wal-Mart Stores Inc
, which in the United States will introduce 100 Wild
Oats-branded organic packaged food products ranging from olive
oil to black beans in about 2,000 stores in coming months.
Walmart, which tends to cater to lower-income shoppers and
sells more groceries than any other domestic retailer, said
those products would be priced on par with conventional rivals
and at least 25 percent below branded organic foods.
"It's really hard for Whole Foods to start a price war. It's
really easy for Walmart," said Wolfe Research retail analyst
For her part, Sumrow says she's spending more time in the
dollar store produce aisles and less time in upscale places like
Whole Foods, though she still splurges on things like
unpasteurized milk for about $6 a gallon and fresh spinach, kale
and chard for her daily juicing ritual. She's not inclined to
loosen up her spending anytime soon, even though she's making
"We have to be very careful with our finances to be able to
get anywhere," she said, adding that neither she nor her sister
plan to have children because it doesn't make financial sense.
"We have to tighten our belts and invest wisely and try to get
established when everything is working against us."
(Additional reporting by Lisa Richwine in Los Angeles,
Theopolis Waters in Chicago and Lucia Mutikani in Washington;
Editing by Jilian Mincer and John Pickering)