Inflation + Slowdown = Pricing Dilemma for Food Makers

As commodity costs have soared, analysts have been pleading with Kraft Foods to raise its retail prices. But the packaged-food giant has hesitated, worried that higher prices would send consumers scurrying to discount brands.

Such is the dilemma created when inflation hits during an economic slowdown.

Kraft is facing "unprecedented input cost inflation," said Rick Searer, the president of Kraft North America, during a food-industry conference last month. But he admitted that outside forces aren't totally to blame, according to the Wall Street Journal's Real Time Economics blog. "Our brands weren't strong enough" to keep customers loyal, he said.

Still, loyalty can go only so far when, for example, dairy prices are rising at a breathtaking rate -- 40 percent in the fourth quarter alone -- even as consumers are worried about their jobs and their savings.

Kraft is a year into a three-year turnaround plan meant to introduce a slew of new products and boost overall sales. At the same time, the company is drastically reducing costs, having recently cut 700 jobs. More cuts are likely on the way, though Tim McLevish, the chief financial officer, told the Chicago Tribune that they won't be drastic.

Some of Kraft's rivals are less worried about passing costs on to consumers. At the same conference last month, Brenda Barnes, chief executive of Sara Lee, said there is no indication that customers are looking for cheaper alternatives to that company's desserts and cold cuts. Sara Lee, for the fourth time in the past 18 months, will soon increase prices on its bread products to make up for rising wheat costs.

And General Mills chief executive Ken Powell said he is "not seeing any resistance" to price hikes on its cereals and snacks. The question now is, how long can that last?