The days of big price increases for U. S. food and drinks makers are likely over due to easing ingredient costs and high unemployment levels that weigh on consumer spending, credit rating agency Fitch Ratings said.
For food companies, 2010 sales should increase by low single digits, in line with long-term forecasts, Fitch said, noting that volume increases should be the main driver.
The only food sectors likely to see greater price increases are areas where commodity costs are expected to rise, such as cheese, Fitch said in a forecast for the food industry previewed by Reuters ahead of its release Nov. 18.
Most food and beverage companies raised prices last year to cope with soaring commodity costs and have since battled to keep those higher prices and protect profits. In some cases, the price increases pushed consumers to lower-priced private-label options.
“Now that higher pricing is no longer a lever the packaged food companies can draw upon, generating cost savings from productivity initiatives will be increasingly important for creating earnings growth,” Fitch said.
Food companies may also look more to acquisitions, especially in emerging markets, to help boost tepid growth, Fitch said, noting Kraft Foods’ US$16.7 billion hostile bid for British confectioner Cadbury.
As the economy recovers, food companies may be less concerned about preserving liquidity and more willing to spend on acquisitions and share repurchases, Fitch said.
Sara Lee could look for a larger acquisition in coffee, bakery or retail food after divesting most of its non-food businesses. Companies with higher ratings such as Campbell Soup, Kellogg and General Mills may also go shopping for deals.
But other companies would find it hard to make large debtfi nanced acquisitions and maintain investment-grade ratings, Fitch said.
Fitch said it expected ratings for most investment-grade packaged foods and beverage companies in 2010 to remain stable, as cost-cutting efforts and increased sales volume should help cash flow.
Fitch expects modest improvement in restaurant traffic in the second half of 2010 as the broader economy continues to recover, but does not expect a rapid upturn in same-restaurant sales until employment and consumer sentiment improve.
“Until you see a turnaround there, it’s unlikely you will see a significant pickup in the restaurant industry,” said Fitch senior director Wesley Moultrie.
On the beverage side, Fitch expects “modest” price increases in 2010. U. S. beverage volumes are expected to grow at the long-term rate of around one per cent, Fitch said in its beverage industry forecast.
International volumes should improve as economies rebound from the global recession, Fitch said. The weak dollar should also boost sales of companies with significant international exposure, with Coca-Cola the biggest beneficiary, Fitch said.
Fitch also does not expect PepsiCo’s decision to buy its two largest bottlers to prompt competitors to do the same.