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Earns for Kellogg, Kraft up, but so are prices

Kellogg's earnings were up in the third quarter, helped in part by higher prices passed on to consumers.

Kellogg's earnings were up in the third quarter, helped in part by higher prices passed on to consumers.

MILWAUKEE – Foodmakers Kellogg Co. and Kraft Foods Inc. posted higher third-quarter revenue and profits on Wednesday, although those gains were helped along by hikes in prices charged to consumers.

Analysts say the companies will continue to benefit as more consumers abandon restaurants in favor of eating at home, but wonder how long shoppers can keep paying these higher prices for name brands before trading down to off-brand products.

“This is a consequence when you raise prices, demand goes down,” said Christopher Sullivan, a research analyst with Frost & Sullivan. “It’s to be expected and I think they knew that too,” he said of Kraft.

Kraft, the maker of Oscar Mayer hot dogs and deli meats, Oreo cookies and Ritz crackers, said its revenue rose nearly 20 percent in the quarter, with pricing increases boosting that 8.4 percent. Volume slipped 0.9 percent, “reflecting the impact of significant cost-driven pricing actions,” the company said.

Cereal and snack maker Kellogg posted a 10 percent rise in revenue and noted that price increases helped offset high costs for commodities for key ingredients like food and oil. It did not break out price increases or changes in volume.

There’s some concern that consumers could be shifting to private-label foods, which are typically less expensive than their branded counterparts. Both companies have been touting their value messages to hone in on consumers worried about the slumping economy and their own rising costs.

Consumer products giant Procter & Gamble Co., which reported earnings Wednesday, likewise raised prices and saw an uptick in sales. It’s also preaching its “value” message for brands like Tide detergent, and coming out with new versions of products to woo consumers who may be looking to trade down, such as cheaper “basic” versions of Bounty paper towels.

Kellogg Chief Executive David Mackay told investors on a conference call the company is boosting advertising and coming out with new products to better compete. A recent ad campaign tells consumers about the value their cereals represent on a per-serving basis.

“Ensuring we continue to build our brand recognition through quality and added value is particularly critical in these tough economic times when private label is likely to grow,” he said.

It’s reasonable to expect consumers to shift to off-brand products, said Matt Arnold, an analyst with Edward Jones. But he said the effect would be minimal because more consumers are eating at home — far more than would be trading down to less-expensive products.

“There’s more people that are actually in the categories and actually buying more of these types of things — food at home is getting a significant boost,” he said. “So there’s challenges but there’s also opportunity here.”

He said demand would still be good for branded products, and that’s what these companies are seeing. Kraft, for instance, is choosing to go after profitability rather than market share, he said — so even as volumes may slip, profit still remains.

Irene Rosenfeld, Kraft’s chairman and chief executive, said in an interview the company is seeing significant growth from brands like Kool-Aid, Kraft Macaroni and Cheese and Jell-O as it touts value messages.

“In the current economic environment we are seeing many more consumers eating at home and as they’re coming home they’re coming home to Kraft,” she said.

In the three months ending Sept. 30, the Northfield, Ill.-based company said its profit more than doubled because of a one-time gain from the $2.6 billion sale of its Post cereals business. On an ongoing basis, Kraft’s profit fell 6 percent.

But including the proceeds from the Post sale, Kraft said it earned $1.4 billion, or 93 cents per share, compared to profit of $596 million, or 38 cents per share, a year ago.

The Post cereals sale added 57 cents to per-share profit, which was lower by 7 cents due to asset impairment and exit costs. Without these items, the company earned 44 cents per share, beating a Wall Street consensus by a penny.

Analysts polled by Thomson Reuters expected 43 cents per share and revenue of $10.5 billion.

Revenue rose nearly 20 percent to $10.46 billion.

Kellogg, based in Battle Creek, Mich., said profit for the quarter rose 12 percent to $342 million, or 89 cents per share, from $305 million, or 76 cents per share last year.

Revenue rose nearly 10 percent to $3.29 billion from $3 billion last year.

Analysts polled by Thomson Reuters predicted a profit of 80 cents per share on revenue of $3.29 billion.

Both companies, like all other food makers, have been hampered by high costs for key ingredients like corn and oil, so they’ve been raising prices to recoup those costs. Kraft said in the quarter, input costs were up $700 million and are expected to be up $2 billion this year over 2007. Input costs are coming down, though they’ll still be above historic levels, the company said.

But companies can’t just raise prices and expect that’ll help margins in the face of high commodity costs, Shanahan said, which is why they’re cutting their own costs, touting their brands and coming up with new products.

“They’ll find price resistance with customers who would choose to switch away to other brands, to private label. It’s a short-term solution to a long-term issue,” he said.

Shares of Kellogg fell 66 cents, or 1.3 percent, to close at $50.02, while shares of Kraft dropped 41 cents, or 1.4 percent, to $28.47.

AP Business Writer Mae Anderson contributed to this report from New York.

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