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July 28, 2008, 12:14 p.m. EDT

More pain in store at the cash register

Commentary: Shoppers seeking out cheaper alternatives

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By MarketWatch

NEW YORK (MarketWatch) -- Sticker shock at the grocery store isn't going away any time soon.


Kraft Foods Inc. on Monday joined the chorus of food and consumer goods companies that, struggling with soaring commodities costs, have in turn passed along price hikes to the consumer.

The Northfield, Ill.-based company, whose brands include Chips Ahoy cookies, Cheez Whiz, Maxwell House coffee and Planters nuts, posted about a 4% gain in quarterly profit and raised its forecast for the year. Price hikes helped to boost results, but market share was under pressure as these higher prices were not immediately matched by rivals. See full story.

"Near term, pricing will remain the primary driver of revenue growth, as input costs continue to escalate, and volume comparisons will remain difficult, Kraft Chief Financial Officer Tim McLevish said during a conference call with analysts.

So prices at the grocery store are rising and will continue to climb, but Kraft saw some strength as people saw its products as cheaper alternatives to their typical meals, making Kraft's higher prices at the cash register the lesser of two evils.

For example, Kraft Chief Executive Irene Rosenberg pointed out that the company's Oscar Mayer Deli Fresh Cold Cuts "remain on fire, positioned against more expensive deli-counter meats," and the Oscar Mayer Deli Creation Sandwiches "represent a significant value, compared with takeout sandwiches."

Volumes have also picked up in pizza for Kraft , which sells DiGiorno and California Pizza Kitchen brands, as the company has "reframed" its products against pizzeria offerings.

People have also been trading down from soft drinks to cheaper powdered Kool-Aid and Country Time beverages, spelling renewed growth for these high-margin products.

But as shoppers trade down, they may abandon brand names altogether and gravitate toward private-label merchandise. Over the years, supermarkets and discount retailers have poured money into refining their store brands, making them as appealing as pricier name-brand items. But, in turn, supermarkets are facing the same headwinds as companies like Kraft are, and if they keep their prices too low it'll eat into profit margins.

In the meantime, there's no respite in sight for bargain-hungry consumers.

-- Angela Moore , U.S. commentary editor

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