Kraft, Sara Lee Not So 'Recession Proof' After All

Just a few months ago, people were asking whether food companies like Kraft and Sara Lee were "recession proof," since they sell a lot of staple items like cheese and bread, which people will buy even during hard times.

Turns out they're not, at least not this time. Both Chicago-area companies reported disappointing results on Wednesday, and both lowered their forecasts.

Part of the reason for this is the anomalous situation in this recession: with most of the economy beset with deflation, food costs â€" and retail prices â€" have remained high, at least until recently. Costs have drifted down, but retail prices haven't â€" not by a lot, anyway.

That has put consumers on an ongoing bargain hunt, seeking out private-label goods rather than branded items. Name-brand packaged-food makers have had to decide how much of their cost increases to try to pass along to consumers. It hasn't been an easy call.

Kraft CEO Irene Rosenfeld, who is two years into a three-year turnaround plan for the company (good timing, eh?), told analysts on Wednesday that the people at Kraft in 2008 "delivered our commitments and made significant strides in staging the portfolio for sustainable growth."

Maybe. But the company also lowered its forecast for 2009 from $2 in per-share earnings to $1.88.

To be fair, consumer resistance to name brands is only part of the story for both Kraft and Sara Lee. In Kraft's case, interest costs rose thanks to a big acquisition, there were some charge-offs in the quarter, and unpredictable commodity prices lost money for the company's hedging operation.

For Sara Lee, international sales were off, and it also had some big charge-offs, including of goodwill.

Both companies were hurt by the strengthening dollar.