PEET Peets Coffee & Tea, Inc. (MM)

Kraft Foods Inc. (KFT) has cut down the prices of its flagship coffee brand Maxwell House by roughly 6% in the US, effective immediately, driven by a decline in the prices of coffee beans.

Accordingly, the price slit converts to 20 cents per pound on roast and ground coffees and 2 cents per ounce on instant coffees, while Kraft covers its Maxwell House and Yuban brands, excluding Gevalia, Tassimo and the Maxwell House International line of specialty soluble beverages.

Kraft is following its rival company, The J M Smucker Co. (SJM) in lowering the coffee prices, which had dropped its list prices by about 6% on August 16 for most of its brands, including Dunkin' Donuts, Folgers and Folgers Gourmet Selections lines.

The attempt to lower coffee prices by Smucker came after 15 months of price increases within the industry. The roasters across the board like Smucker, Kraft, Starbucks Corp. (SBUX), Peet's Coffee and Tea Inc. (PEET) and Green Mountain Coffee Roasters Inc. (GMCR) have increased the prices for coffee beans in recent years due to growing demand and harsh weather. The prices also increased on the back of higher fuel and packaging costs, which forced the companies to charge higher from their customers.

Both Smucker and Kraft raised their list prices for coffee four times between May 2010 and May 2011, with Smucker's increase reaching a total of approximately 38% for shoppers, while for Kraft, the total increase was nearly 56%.

On August 9, Kraft posted robust second-quarter 2011 earnings of 62 cents per share, ahead of the Zacks Consensus Estimate of 58 cents. Management credited the benefits of increased investments in marketing and innovation, and focus on End-to-End Cost Management for strong results in the quarter.

The company is also planning to spin off its North American grocery business to its shareholders and split into two independent public companies. One would focus on international snack brands, and the other on its North American grocery business.

Kraft is stated to drive confidence from the belief of continuing strong business momentum in the challenging environment of weak consumer and category growth as well as significant input cost inflation.

We remain encouraged with the company’s investments in quality upgrades, promotions and marketing as well as initiatives taken to improve margin and productivity by reducing manufacturing and overhead costs and enhancing operational efficiencies by modernizing plants and information systems.

Currently, we prefer to rate the stock as Neutral. Further, Kraft Foods holds the Zacks #2 Rank, which translates into a short-term Buy rating.

 
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