Higher food prices start to pinch consumers

By Julie Jargon | The Wall Street Journal
    January 7, 2008


With the rising cost of milk, eggs, meat and produce contributing to the biggest jump in food prices in 17 years, consumers are starting to feel the pinch.

Some shoppers, already dealing with falling home values and rising fuel costs, are finding creative ways to save, opting for cheaper ingredients and private-label goods and leaning more heavily on discount grocers. And restaurant diners, who have been eating out less frequently, will likely face even higher prices on menus.

For Christmas dinner, Karen Littleton, a 54-year-old freelance writer in San Antonio, said she bought a huge salmon fillet at discount retailer Costco Wholesale Corp. rather than an "exquisite fish," such as Chilean sea bass, from a local grocery store.

She said she loves to prepare gourmet dishes, but "I'm using cheaper foods and having to be more imaginative with how I put them together. ... I used to use eight or 10 ingredients in just a sauce, but those days are over."

Many of the price increases seem small on a per-item basis. The average retail price of a dozen eggs went up 38 percent to $1.86 in November from a year earlier; a gallon of milk rose 30 percent to $3.90; and whole-wheat bread rose 12 percent to $1.78 per pound, meaning a 24-ounce loaf of bread now costs, on average, $2.67.

But the costs can add up on a weekly grocery bill. Overall, food prices as measured by the consumer price index rose at a 5.3 percent seasonally adjusted annual rate through November, compared with a 2.4 percent rise for all of 2006. That is the biggest increase since 1990.

Food prices are rising for a number of reasons. A growing middle class in Latin America and Asia can afford more meat and milk, which has driven up demand for grain to feed cattle and hogs. A drought in Australia in 2006 reduced the supply of milk available to Asia, further pushing up the cost. Rising global demand for U.S. wheat and poor harvests in other wheat-producing countries caused wheat prices to soar to record levels last year.

Demand for grain-derived ethanol, driven by government incentives, has helped push up corn and soybean prices, which in turn have raised the cost of many products derived from those crops, such as oils and high-fructose corn syrup, a sweetener used in everything from soft drinks to ketchup. To top it off, rising fuel costs are making it more expensive to transport food from the producers to stores and restaurants.

"Between weather conditions, fuel charges and labor, everything's going up," said Sandy Levine, vice president of Carnegie Deli in New York, which will be raising prices on several menu items this year. A slice of cheesecake will cost $8.50, up from $8, and coleslaw will cost $4.50 instead of $4. The deli processes its own meat, but with produce, Levine said, "I can't buy direct. It has to be trucked across the country from California or Florida."

For the past several months, food manufacturers including General Mills Inc. of Minneapolis and Sara Lee Corp. of Downers Grove, Ill., have been passing along their higher costs to retailers, which in turn have been passing them along to consumers. In addition to basics like bread, cereal, cheese and eggs, nonessentials such as chewing gum, chocolate and ice cream also have become more expensive.

Last week, an 18-ounce box of Kellogg's Corn Flakes cost $4.29 at an Albertsons in Lake Havasu City, Ariz. The same box at a nearby Safeway cost $3.79, while it cost $3.43 at a nearby Smith's, a chain owned by Kroger Co. Each store offered an in-house brand, which varied in price across the three stores from $1.89 to $2.79. Other private-label goods were priced at a significant discount. A 7.25-ounce box of Kraft Macaroni and Cheese Premium Thick 'n Creamy cost $1.69 at Smith's, while the store-brand competitor made by Kroger cost 49 cents.

Phyllis Hoag, an interior-design consultant shopping last week at a Smith's in Lake Havasu City, said she now plans many of her family's meals around what's on sale. After reviewing the weekly specials, she scooped up six T-bone steaks for $3.99 a pound. "Usually they're $9.99," Hoag, 47, said as she pushed her cart down the pasta aisle. "I just try to shop with ads and stock my cupboards with dry goods that are on really good deals."

Some large conventional supermarket chains such as Kroger and Safeway Inc., which have passed along most of the price increases in food products, say they haven't felt a negative impact on their sales. "In our view, periods of modest inflation (are) a positive for our business, because inflation tends to improve sales," Kroger CEO David Dillon told analysts in December.

And not all food items have gone up in price: The average price of red delicious apples remained flat, as did the price of malt beverages. But food analysts are predicting that the prices of most food products are likely to continue to rise throughout 2008.

Carol Skusek, a mother of two teenage boys in Temecula, Calif., said she is buying cheaper cuts of meat to pare her grocery bill. "If I buy a chuck roast instead of a rump roast and just cook it longer in some sort of broth, it's just as tender," said Skusek, 47. She shops at a nearby Stater Bros. grocery store just before it closes at 11 p.m., when butchers often slash the price of meat that is near its sell-by date rather than throw it away. "I recently got hamburger for 99 cents a pound, and it's normally over $3 a pound," she said. She is also shopping more at a discount grocer, WinCo Foods.

That shift appears to be helping Wal-Mart Stores Inc., which recently said its rate of food inflation is lower than that of the rest of the grocery industry. During an earnings conference call in November, Eduardo Castro-Wright, chief executive of Wal-Mart's U.S. business, told investors: "Our grocery business, including pharmacy, was strong throughout the quarter, and Supercenter food sales grew by more than 13 percent."

Restaurants have had a hard time passing along price increases because consumers already had cut back on dining out due to rising gasoline prices and declining home values.

Burger King Corp. raised its prices 1 percent in July. McDonald's Corp. said in October it raised prices by about 3.5 percent during the previous year and will continue to adjust for higher dairy and chicken costs. Some McDonald's franchisees have raised prices of items on the company's Dollar Menu above the $1 mark. At one Chicago restaurant, for example, that menu has been renamed "Dollar Menu & More," and includes a $1.29 double cheeseburger and $1.49 chicken snack wrap.

Angel Crawford, a 49-year-old Chicago resident, said she visits McDonald's every day for breakfast and other meals but has been staying away from the higher-priced items on the Dollar Menu & More section. "I don't buy them because they went up," she said.

Wing Zone Franchise Corp., a chain of 103 restaurants in the Southeast, instituted an 8 percent price increase in August and will try not to raise prices again during the first six months of 2008. "There isn't a single product in our restaurant that hasn't gone up in cost from the vendor," said Wing Zone founder and CEO Matt Friedman.

Now, an order of 20 chicken wings costs $12.99 instead of $11.99 -- and that has cost Friedman some customers. Between September and December, Wing Zone saw its customer count go down by 2 percent to 3 percent.