Frugal US consumers make it tough for food companies to raise prices

Frugal US consumers make it tough for food companies to raise prices
US consumer prices rose 1.5 per cent 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 per cent, against the central bank's target of a 2 per cent inflation rate.

NEW YORK - 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 US 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 per cent 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 the increases.


Kraft has raised, or will soon increase, prices on about 45 per cent 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 US 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 other ingredients.

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 US milk prices go up, shoppers buy less, according to Dean Foods Co, the largest US milk processor. Fluid milk industry volumes fell 2.1 per cent 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 April."

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