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Natural Foods Merchandiser

Prices put squeeze on manufacturers

Mainstream manufacturers are feeling the pressure of rising prices on the materials and raw ingredients used in manufacturing. Many large companies have responded with a variety of measures, including price hikes, packaging changes and even substitution of lower-cost ingredients in their formulations.

General Mills has replaced pecans with walnuts in cookie recipes and reduced the number of spice and ingredient packages in Hamburger Helper, cutting costs by 10 percent, according to the Wall Street Journal. Hershey's is replacing cocoa butter with vegetable oil in a variety of its products, including Milk Duds and Kissables, and has changed its labeling from "milk chocolate" to "chocolate candy" because these reformulated products no longer meet the U.S. Food and Drug Administration's definition of milk chocolate, according to a Today Show story.

Over the 12-week period ending Aug. 9, food companies raised prices an unprecedented 7.3 percent across 35 key product categories, according to AC Nielsen.

These cost increases raise two questions for the naturals industry: How will manufacturers respond to rising prices? And will consumers move away from higher-priced natural and organic products in this time of economic uncertainty?

"Our data show that organics fared well during the first four or five months of this year," says Bill Crawford, director of retail publishing programs at New Hope Natural Media. "But what sets natural products apart is the ingredients. Naturals manufacturers will be unlikely to embrace [lower-cost ingredients] because it would undermine product integrity and erode their main point of differentiation."

"As commodities prices continue to skyrocket, some companies are downsizing the finished product and the size of the package, and others are moving toward contract buying on high-volume commodities to keep prices down," says Lynea Schultz-Ela, owner of A Natural Resource Consulting in Hotchkiss, Colo. "It's a very tricky situation, and successful management of the problem means doing a little bit of everything, focusing on all cost-cutting measures so that market traction isn't lost in the short term. I do not see manufacturers downgrading their ingredients in the naturals industry, which is certainly a good thing."

Mitchell Clute is a Fort Collins, Colo.-based freelance writer.

Natural Foods Merchandiser volume XXVI/number 8/p. 12

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