Price Wars: Private Labels Strengthen Retailers Position, but Producers Stand Firm

(MoneyWatch)  The growing success of private labels has given grocery chains more muscle when it comes to negotiating with food companies. Safeway last month threatened to further push its store brands if suppliers didn't lower their prices, and CEO Steve Burd colorfully declared Safeway would "chew them up on corporate brands."

Nevertheless, food companies are resisting pressures to drop prices. Commodity prices have fallen significantly, and grocers say their customers want to know why food prices haven't followed. But companies like Kellogg and Nestle have a few reasons to hesitate. Prices remain volatile, they say, and they're still above historical averages. For example, costs for Dreyer's ingredients have been going up since 2003, Nestle says, yet the company boosted prices only last year.

And, as Heinz CEO Bill Johnson put it, it's better to lose some market share than slash prices simply to "achieve an end result that could be best described as profitless prosperity."

Some analysts predict companies will start investing in bigger, more frequent promotions rather than cut prices. "Discounting just a little is not enough, especially against private label," Jon Hauptman of Illinois consulting firm Willard Bishop told Supermarket News. "We could see one- or two-week deep price reductions instead of longer, shallower temporary price reductions."

At the Food Marketing Institute's Annual Business Conference this month, a majority of companies in attendance apparently expressed their intention to do exactly that -- to start offering deals as soon as prices "stabilized." However, according to one store executive, "we couldn't get a single commitment from any company as to when that change would occur."