Food Makers Scrimp

In 2007 we wrote how food companies, in an effort to "trick" the masses, were keeping prices flat while reducing the size of their boxes. (No inflation that way, right?) Now from the Wall Street Journal, we see the next iteration of that – wholesale substitution or elimination of ingredients (once again no inflation). This is yet another reason to simply mock the "inflation" figures – a lot of trickery is being done behind the scenes to make a bad problem look a lot better than it is. Implications: inflation is real and under reported. You (consumer) are getting less while paying equal or more. The government will assure you, you are just dreaming and inflation is not only under control but will go away. p.s. stop whining. 

As a market pundit I am here to tell you as crude falls $30 and gasoline drops from $4.19 to $3.79 you are to ignore Hershey’s raising wholesale prices by 11% (the 2nd increase this year) – it is just in your imagination and the US consumer won’t even notice it. And in fact even as crude oil prices fall, I am sure good hearted corporations will return to larger boxes, take back their prices increases, and put back in ingredients they took out – so therefore the consumer will be made whole. Now – please buy discretionary consumer stocks because HAL 9000 dictates it as that’s what the playbook says.

• The Hershey Co. said Friday it is raising prices on its products by an average of 11 percent as the nation’s largest candymaker tries to stem the impact of soaring commodities costs. The price increase was the second already this year for the candy company known for its Hershey’s chocolate bars, bite-sized Kisses and Reese’s peanut butter cups.
• The immediate increase was necessary to offset "significant increases" in the cost of raw materials such as sugar, cocoa and peanuts — up as much as 45 percent since the start of the year — as well as the growing cost of fuel, utilities and transportation, Hershey said.
• "The size of the price increase is the real surprise," Wachovia analyst Jonathan Feeney said in a client note.
• Feeney said the confection industry historically has been recession resistant. (even more surprising when there is no recession – source: official US government statistics) 

So we’ve now figured out both Las Vegas and chocolate are not recession proof – they are seeing falling demand and there is not even a recession; just imagine when an official recession happens. Remember we are in a "see no evil, hear no evil" period of "slow growth" or as government officials call it "a few bumpy spots in the road of prosperity". Let’s get into a few more details about what our food companies are doing about it.

• Major food makers are quietly altering their recipes on candy, dairy products and other top-selling lines, adding fillers and substituting cheaper ingredients to cut costs amid the commodities boom. (Hello Wall Street Journal – how will they quietly get away with this if you blair it on your front page… ahh, most sheep won’t read your paper anyhow – carry on.)
• Hershey Co. is substituting vegetable oil for a portion of the cocoa butter traditionally used in some of its chocolates. Spice maker McCormick & Co. is now supplying food companies with cheaper spices and new flavor blends, such as Mexican oregano instead of pricier Mediterranean oregano, and garlic concentrate instead of heavier (and costlier to ship) garlic cloves.
• General Mills Inc. says that by reducing the number of spice and ingredient pouches in boxes of Hamburger Helper — and by halving the number of pasta shapes used in the product line — the company has trimmed manufacturing costs 10%. The company is also replacing pecans with less expensive walnuts in its Pillsbury Turtle cookies.
• Soy protein, a low-cost meat filler long used in school-cafeteria hamburgers, is making its way into more packaged foods, says Michael Considine, an executive at Minnesota grain company CHS Inc. In the past two years, he has seen a 10% increase in the volume of soy protein the group sells to major food companies, he says.
• Most of the tweaked products still cost the same for consumers, if not more.
• On Friday, new data showed that food companies raised prices across 35 key product categories by 7.3% over the 12-week period ending Aug. 9, according AC Nielsen. The increases are "unprecedented," Sanford Bernstein analyst Alexia Howard wrote in a note to investors. (that would a 30%+ yearly price increase if the 12 week period held – but nevermind that, gasoline prices dropped 30 cents – the consumer "is back" trade is on! Can’t let facts get in the way of a good punditry thesis.)
• Also on Friday, Mars Inc., maker of M&Ms candies and Snickers bars, said it’s raising some prices and cutting the size of its Funsize candy packs.
• Taste can be a concern, too. While food makers say the changes don’t alter the flavor of their products, "the risk of tweaking formulas too much is that slowly and almost imperceptibly, you gradually alter the taste … so that after five alterations, you have something that tastes different than it did five years ago," says Robert Moskow, a food-industry analyst with Credit Suisse.
• Other companies are gussying up lower-end products to make them more appealing. Cargill Inc., of Minneapolis, in July introduced to supermarkets cheaper cuts of meat with fancy-sounding names like Maranada steak (flank steak), Marbello steak (skirt steak) and Cordelico sirloin (flap meat). These cuts come from less tender regions of the cow, unlike pricier cuts such as filet mignon, which comes from the tenderloin muscle. (ah, the age old trick of putting fancy names on piles of crud – works like a charm! I’d like to introduce the new and improved Superduper Yummyformytummy Sirloin – this comes from the rear portion of the cow but we don’t want to get to specific as to the exact location. Just know it’s yummylicious – how could it not be with a name like that?) 
• Restaurants, too, are fiddling with their dishes. Sysco Corp., the nation’s largest food-service company by sales, has been working with restaurants to make cost-saving changes such as replacing butter with oils that are blended with butter.
• This month, McDonald’s Corp. said it’s testing less expensive ways to make its $1 double cheeseburger; already, some restaurants are selling the burger with one slice of cheese instead of two. And in a Thursday interview, Burger King Holdings Inc. CEO John Chidsey said the chain is testing a smaller Whopper Jr. hamburger as it tries to overcome high ingredient costs. (same low price! no inflation again – government loves this sort of stuff – this way inflation can never rise – in 5 years – the hamburger without the burger! 2 pieces of bread with lettuce, ketchup, and mustard! still $1!)
• Most of the recent alterations generally can be spotted only in the fine print of the package’s ingredient list. That stands in contrast with manufacturers’ practice of occasionally touting changes that, say, add fiber or whole grains with prominent "heart healthy" promotional language on the packaging. (shocker)
• Another ingredient supplier, NutraCea Inc., a small publicly traded company based in Phoenix, reports seeing an increased demand from food makers for its rice bran, a rice-milling byproduct that until about 20 years ago used to be fit only for animal consumption.

Do I really need to say anything more after that last bullet point? What was good enough for your dog 20 years ago is now good enough for you. 

The Pooring of America continues – in very stealthy ways. People are falling behind in more ways than the obvious. Bad for Main Street – great for Wall Street. Go long stocks. And short the bottom 2/3rds of American’s lifestyle.