Kraft Foods, Inc. (NYSE: KFT) is in a bit of a pickle. As the following article makes clear, the company knows it has to raise prices. There's just no choice in the matter. Commodity input costs are on the rise, and something has to give. But the problem is, consumers not only have to pay more for Kraft foodstuffs, they have to ante up more of the green stuff for everything else too -- fuel for the car, heating oil for the home, you know the drill.
If you're a Kraft shareholder, should this concern you? What about if you own other consumer-oriented stocks based on the supermarket shelves that are feeling the inflationary pinch, companies such as General Mills, Inc. (NYSE: GIS) -- which reported earnings today -- or Kellogg Company (NYSE: K), or maybe even beverage businesses like The Coca-Cola Company (NYSE: KO) or PepsiCo, Inc. (NYSE: PEP)? Well, it should, of course. Inflation is no fun, and with the price of oil hitting new highs recently, a trend that seems very much intact, consumers will be strapped. In fact, Kraft is now trying to make up for lower volumes by raising the cost of its goods; this isn't ideal, perhaps, but Rick Searer, who is the president of Kraft North America, brings up an almost humorous point -- "consumers have to eat." I have yet to meet one that doesn't, come to think of it!
But I think the consumer companies are relatively sophisticated with their data-analysis protocols and are, perhaps, a bit more nimble in terms of deducing what shoppers want to buy for purposes of stocking their pantries. At least, I would hope they are -- we've been hearing about better data-mining techniques for years. Kraft obviously will promote a wait-and-see attitude in terms of the consumer and her reaction to the recession, but I don't think shareholders should be overly worried at this point. A lot of these defensive names have international exposure and stand to benefit from the falling dollar, for one thing. For another, we all have to eat! And since the defensive names generally have dividend yields, they tend to be safer bets during a recession; don't think they can't fall, though, because they can. One just hopes they don't fall as much as, say, your typical financial entity or a broad market index.
Disclosure: I own shares of Coca-Cola; positions can change at any time.
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Reader Comments (Page 1 of 1)
3-19-2008 @ 6:29PM
AUGUST said...
Sorry, but Kraft doesn't "have to," raise prices... no Fortune 500 Company "has to," over the short haul. 98% of them could contribute to the healing of America's economy by weathering this "period of crisis," (or even an entire year), at a lesser profit or even zero profit growth. That is, IF they were interested in the economic health of the USA that is outside their holdings. Of course, (I'm old... not stupid), shareowners and corporate governance would never go for it.
The pathetic part is, many Fortune 500 Companies are enjoying record-breaking profits during economic downturns by attributing ALL of their increases to "economic conditions."
The ONLY consistent truth is that it is ALWAYS the taxpayer and consumer who pays the entire bill. ALL of it, all the way through... every penny. (anyone out there know where we might find maybe 20 million more taxpayers to help us out?) Whoops, sorry that just slipped out!
Anyway, until there is powerful citizen oversight (not the sitting government, who is currently in for a healthy percentage of the corporate gain) and ferocious boycotting of gouging corporate abusers, prices will continue to go up.
Thanks for listening.
AUGUST
3-20-2008 @ 7:31AM
Michael Schneider said...
Kraft has been behind the curve on raising prices and it has cost them money. They are in a situation where they have to raise prices or eat the costs themselves. They have been benefiting from a weak dollar but the dollar is strengthening now. If costs moderate it would help. I think Kraft is undervalued which is why Warren Buffett and Nelson Peltz bought in.
August-- I don't see this as an issue for taxpayers except in regard to ethanol policy and land conservation policies that are part of the cause of rising food prices-- bu that is not the fault of Kraft or food companies who are probably on the side of consumers on those issues. . It is a concern for consumers but Kraft held back on raising prices and consumers of course have choices. If things get tough people can buy generics more which is why companies like Kraft won't raise prices more than they have to. Competition in the food industry works to the consumers benefit. The rising prices are a product of strong demand-- if prices didn't rise there could be food shortages.
3-20-2008 @ 7:36AM
Michael Schneider said...
Those interested in Warren Buffett's involvement with Kraft might find his most recent interview interesting because he talked about oil and agriculture and was more positive toward the long term case from oil since he thinks there is room for productivity in agriculture. (See Billionaire Watch section- yellow label, top- at http://www.Barrelomoney.com).
3-27-2008 @ 3:51PM
NEWT said...
AUGUST.....MUST NOT BE A SHAREHOLDER OF KRAFT, MUST HAVE NOT HAD ANY ECONOMICS COURSES IN SCHOLL, MUST NOT UNDERSTAND THE VITAL ROLE THAT COMPETITION PLAYS IN THE U.S. ECONOMY. IT IS VERY SIMPLE: IF KRAFT DOES NOT MAKE PROFITS SUFFICIENT TO PAY A FAIR DIVIDEND, IF IT'S PROFITS ARE NOT SUFFICIENT FOR IT'S STOCK TO INCREASE IN VALUE, SHAREHOLDERS WILL WITHDRAW THEIR INVESTMENT (SELL THEIR SHARES), AND POTENTIAL INVESTORS WILL LOOK ELSEWHERE, LEAVING KRAFT WITHOUT CAPITAL TO IMPROVE ITS BUSINESS AND THE RESULTING INCREASE IN FUTURE PROFITS. AND, WITHOUT NEW CAPITAL, KRAFT CANNOT COMPETE IN THE MARKET PLACE, THEREBY REDUCING IT'S ABILITY TO COMPETE, THE END RESULT BEING FEWER J0BS, LES COMPETITION IN THE MARKET PLACE, ALL TO THE DETRIMENT OF THE CONSUMER AND THE KRAFT JOB HOLDER. IT IS PROFIT THAT KEEPS THE ECONOMY GOING, THAT CONTROLS THE IMPACT OF INFLATION, OR DEFLATION. IT'S THE ECONOMY, DUMMY.
NEWT