MDLZV Kraft Foods Inc. - Common Stock Ex-Distribution When Issued (MM)

By Heather Haddon and Annie Gasparro 

Food makers are devising more-expensive sizes and flavors of their treats and breakfast foods, a subtle strategy to cover rising costs as tough competition holds down prices elsewhere in the supermarket.

Gilding the lily can pay off. Mondelez International Inc.'s new fudge-dipped Oreo Thins Bites cost 56 cents an ounce at Walmart, compared with 30 cents an ounce for standard Oreo Thins cookies and 18 cents an ounce for traditional Oreos.

Similarly, Hershey Co. is designing new stand-up pouches of candy coming out in the spring that will cost more per ounce than current bags.

From Kellogg Co., Eggo waffles flavored with imported vanilla cost 28 cents an ounce, compared with 23 cents an ounce for the standard version, according to prices at Peapod, the grocery-delivery service of Ahold Delhaize NV. And Kellogg's new Special K probiotic cereal goes for about 26 cents an ounce, compared with roughly 22 cents an ounce for its traditional Special K, according to prices at Walmart Inc.'s Jet.com online service.

The introduction of these more expensive varieties is one reason dry-grocery prices rose nearly 2% in the year ended in November, according to Nielsen. By volume, dry-grocery sales were flat over that period.

"They can charge a premium, even though the input costs have mostly stayed the same," said Andrew Csicsila of the consulting firm AlixPartners.

Food makers and grocers are used to tough negotiations over what to charge shoppers. Stores want a tight lid on prices. That said, grocers and other retailers have proven more amenable to higher prices on new flavors or styles of an existing product than to raising prices on familiar packaged foods, whose sales have fallen. Amazon.com Inc. has been pressing brands to rethink their packaging and product varieties to make online sales more profitable.

Hostess Brands Inc., the producer of Twinkies and Ding Dongs, is creating new flavors of premium snack cakes called Bakery Petites "to attract new consumers at higher price points," Chief Executive Andrew Callahan said on a recent conference call. Bakery Petites cost 47 cents an ounce at a Walmart in Chicago, more than double the price-per-ounce for Twinkies.

Kroger Co. Chief Executive Rodney McMullen said food makers need to demonstrate that their new flavors and styles are distinct enough to draw shoppers away from the standard version of their product.

"Creating something I didn't know I need is innovation," Mr. McMullen said in an interview.

Innovation can resonate with customers -- if they are getting what they want. Jed Cusimano, a 39-year-old product manager in health-care data integration, said convenience is the most important thing he looks for when grocery shopping. "Individually wrapped snacks. Single serve. It's worth paying extra for that than getting a big bag of chips or something, " he said.

"I'll pay extra for resealable packaging, to keep the food fresh. It's worth it," said Lisa Posey, who is in her 50s and lives in Chicago. "I'm single and don't have kids so I don't go through food as quickly, and I can afford to pay a little more."

Price is still top of mind for shoppers, with 77% of 1,035 consumers surveyed by the Food Marketing Institute trade group saying they picked their primary supermarket based on low costs. Variety and selection of goods was close behind as a motivating factor, at 74%.

Prices for shelf-stable goods are rising, federal data show. Snacks, spices, salad dressings, sweets, juices, cookies, cakes and juices were among the goods that saw annual prices increases, according to consumer-price index data released Wednesday. Costs of carbonated beverages posted the steepest annual increases in more than two years.

California-based Smart & Final Stores Inc. has received requests to raise prices from about half of its 1,500 main suppliers. The chain of more than 300 stores is pushing back, but price increases have occurred and officials expect more to come next year, said Chief Executive David Hirz.

Smart & Final and other grocers are stocking more of their own low-price store-brand items in hopes that customers won't feel the shopping trip is getting more expensive overall.

Kroger executives say they have pushed back on some food makers' proposals to raise prices, with plans to stock more of their cheaper private-label goods next to those items. Making Kroger-branded salad dressing and pasta sauce also gives them firsthand knowledge of what a food costs to make, these executives said, providing additional leverage over food makers.

J.M. Smucker Co. said low prices on competing store brands have made it difficult to charge more for its Jif peanut butter. Smucker, too, is planning to introduce new products next year to draw in new customers.

"Our goal is to protect profit," Chief Executive Mark Smucker said on a conference call.

Write to Heather Haddon at heather.haddon@wsj.com and Annie Gasparro at annie.gasparro@wsj.com

(END) Dow Jones Newswires

December 19, 2018 05:44 ET (10:44 GMT)

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