In the US markets, both Kraft and Sara Lee are feeling an additional squeeze on their pork and beef costs.
With the American public facing rising inflation and a possible recession, the companies will find it tougher to offset their costs by charging higher prices for cold cuts, hot dogs and sausages.
Analysts believe that both companies need to thread carefully when raising their prices to avoid losing market share to cheaper, non-branded meats.
Brenda Barnes, CEO for Sara Lee, commented in February that her commodity costs had increased more than US$170 million in the previous six months. Higher costs contributed to weaker-than-expected profit of 22 cents a share in Sara Lee’s most recent quarter, about 2 cents below expectations.
Kraft’s 2007 pre-tax profit margin fell to 10.0% from 11.7% the previous year, the fifth consecutive annual decline. CEO Irene Rosenfeld said last month that recent commodity price increases were “unprecedented”.
To cover the rising costs, Kraft is “actively reducing its business expenses” and developing new products, she says.
Both companies’ dominance in the packaged meat segment may help them overcome the bad times. Sara Lee has around 18% of this market with Kraft occupying around 19%. No other company has more than 10%.
In 2007, Sara Lee had meat sales of US$2.6 billion, or 21% of its total revenue. Kraft doesn’t provide meat sales figures but says Oscar Mayer brands (a subsidiary of Kraft) had more than US$1 billion in sales last year.
â€¢ Kraft Foods
â€¢ Sara Lee