Transcripts

The Food Sector Offers A Smorgasboard of Quarterly Earnings

PAUL KANGAS: Big names from the food sector reported quarterly earnings today. The results were hot and cold. Kraft Foods reported better than expected second quarter earnings of $0.48 s a share. Wall Street expected only $0.40. It was a different story at Tyson Foods, where higher grain prices pretty much wiped out profits. The world's largest meat packer earned only $0.03 a share in its third quarter. On a whole, the food sector has been hard hit by rising commodity costs. But as Scott Gurvey reports, it is weathering the storm.

SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: The big run-up in commodity prices has created a nightmare for the food and beverage sector. Analysts say companies have had to pass on their higher materials costs to consumers. Kraft was forced to raise prices for many of its products, especially cheese, which is made with milk. Wholesale dairy prices have soared along with the rising price of feed for livestock and increases in transportation costs. Analyst Terry Bivens of JPMorgan says consumers tolerated the higher prices, but are changing their buying habits.

TERRY BIVENS, FOOD MANUFACTURER ANALYST, JPMORGAN EQUITY RESEARCH: There is some evidence to suggest that consumers are shopping for cheaper price points overall. That seemed to be particularly true in Kraft's cheese section this time and we've seen some trade downs in other sectors as well -- cooking spices, for example and even with commodity milk.

GURVEY: Analysts expect this trend to continue as input prices continue to rise. They say consumer trade downs are most likely to occur on items like natural cheese, packaged meat, baked bread and in categories where there is a strong store brand presence. But there are categories where brand loyalty is strong. In past recessions, for example, consumers have stuck by their favorite breakfast cereals, a factor which bodes well for Kellogg and General Mills as well as Kraft. There are also indications that consumers are cutting back on eating out. David Palmer is a restaurant analyst with UBS, which does business with General Mills, Heinz and most of the other companies in the food sector. He says while only a quarter of our meals are eaten away from home, we spend half our food dollars in restaurants.

DAVID PALMER, FOOD PRODUCTS AND RESTAURANT ANALYST, UBS: That's a lot of dollars to source from if you're a packaged food company. So many of the packaged food companies that have convenient meal options are doing particularly well these days, General Mills or Heinz in particular. They're seeing some very nice volume trends of over 3 percent and with pricing on top of that.

GURVEY: Palmer says the so- called trade down risk is greater in Europe than in the U.S. because there are more private labels overseas. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.