By Brad Dorfman

CHICAGO, Aug 11

(Reuters)

- U.S. food companies, which have been raising prices for a year or more to combat soaring commodity costs, have a new message for consumers: "We can save you money."

 

The idea is to position well-known food brands as an antidote to the higher price of eating out. Investors have already warmed to the idea, renewing interest in food makers like Kraft Foods Inc Kellogg Co.

During its quarterly earnings call with analysts late last month, Kraft Chief Executive Irene Rosenfeld, for example, emphasized the value of Kool-Aid drink mixes, Jell-O powdered gelatin and other items for consumers looking to save money.

"We have subtly shifted some of our messaging on some of these key iconic brands," Rosenfeld said during an interview.

The idea for consumers is that products like a DiGiorno pizza from Kraft are less expensive than a restaurant pizza, or that a bowl of cereal is less expensive than an Egg McMuffin at a McDonald's Corp location.

Kellogg Co Chief Executive David Mackay noted in an interview that cereal with milk costs about 50 cents a serving. While he would not say whether Kellogg would emphasize a value message to consumers, he called the strategy a "good idea."

"I think cereal as a category is very well positioned even as consumers come under a fair amount of pressure," Mackay said. "I think our portfolio is very well positioned for consumers looking to save money."

For investors, the message is that consumers are buying these products as they cut back on eating out -- and that some of the products are more profitable for manufacturers.

"It's an opportunity that these food companies can seize on and they are seizing on it," Matt Arnold, analyst at Edward Jones said. "They are taking market share from restaurants, no doubt."

FOOD RALLY

Food stocks, as measured by the Standard & Poor's U.S. packaged foods index .15GSPFOOD fell about 15 percent between the middle of July 2007 and early in July 2008 as prices soared for basic ingredients like wheat and other commodities like oil.

Food companies have raised prices in order to offset those increases, but many investors feared the move would turn off cash-strapped consumers, who would look for cheaper brands.

Since July 3, however, the U.S. packaged foods index is up more than 13 percent as commodity prices drop and food companies such as Kraft and Sara Lee Corp report earnings that beat analysts' estimates. Some on Wall Street took heart from the fact that many food companies were able to increase profits even in a weak U.S. economic environment.

They are also finding that branded food makers are benefiting at the expense of restaurants as consumers eat more meals at home to save money.

"Although private-label is gaining traction ... weak economic conditions are also driving consumers out of restaurants and into the grocery store," David Driscoll, food analyst at Citigroup Global markets, said in a research note.

Driscoll said that should help mitigate the impact to food companies from any trade-down to private-label. He also listed ConAgra Foods Inc H.J. Heinz Co and General Mills Inc as favorite stocks.

General Mills and Kellogg both outperformed the broader market in the 1970s when food and energy prices surged and seem to be weathering the current environment, Credit Suisse analyst Robert Moskow said in a note to clients.

"The benefit of consumers trading down out of restaurants and into at-home food consumption is helping these companies pass through pricing without taking a hit in volume," Moskow said.

CASUAL DECLINING

The restaurants being hardest hit in the weak economy continue to be casual dining chains, as evidenced by the bankruptcy filing of the parent of Bennigan's last month.

Goldman Sachs restaurant analyst Steven Kron recommended that investors reduce exposure to that sector in a note dated Sunday and cut his recommendation on Chili's Grill & Bar owner Brinker International Inc to "sell" from "neutral."

Kron cited growing concern that sales trends in the sector will slow further in the second half of 2008 and into 2009.

While casual dining is out, the once neglected "center-of the-store" may be back in vogue.

Those aisles, which carry staple foods like cereal, soup and canned sauces, fell out of favor in recent years as grocers expanded offerings of prepared foods and fresh produce to lure back consumers who had fled to restaurants.

But now, Kellogg's Mackay said that the company's cereal, Keebler cookies and crackers and other center-of-the store items have done well.

Still, some foodmakers hesitate to focus on price when making their pitch to consumers and instead focus on the quality of their products.

"It's not just the price you pay," Sara Lee Chief Executive Brenda Barnes said. "It's what you get in the price you pay."

Provided by Reuters

© Reuters 2008 All rights reserved

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