Costlier food drives ‘barbell effect’

by Pan Demetrakakes
Executive Editor

Rising food prices would seem, logically, to motivate consumers to seek out less expensive foods. But some recent studies have shown a significant number of consumers heading in the opposite direction.

A report by Holland’s Rabobank, which specializes in financial services to the food and agriculture industry, referred to a “barbell effect” among food shoppers: The majority of them are going for either low prices, at one extreme, or high value at the other. The high-value end of the “barbell” could consist of several attributes, including quality, healthiness and convenience.

Buying costlier, higher-quality foods may seem counterintuitive when food prices are rising, but it makes sense, at least over the short term. The Rabobank report notes that many consumers are increasing their at-home food budget by cutting down on meals away from home. This is one reason why most major food retailers showed same-store sales growth over the first quarter of 2008, while restaurant sales are stagnant or declining—even though the inflation rate for food away from home (4.1%) is lower than for food at home (5.5%).

In a survey for Whole Foods Market, 79% of respondents said they did not want to compromise the quality of foods they buy regardless of rising prices, and 70% said they are buying the same amount of natural/organic foods they always have. They survey, conducted by Harris Interactive, also found 67% would prefer natural/organic foods if their prices were comparable to those of regular products.

The Rabobank report also notes that many food processors have so far been protected from the full impact of ingredient price increases by long-term contracts with suppliers. As these contracts expire and processors are forced to pass along increases, consumer buying patterns may change.

The food companies that succeed in making price increases “stick”—that is, without driving consumers to lower-cost alternatives like private label—will be those with unique, hard-to-replicate products. Analysts say this is why companies like Kraft Foods and General Mills have enjoyed good recent financial performances, despite the general inflation in the food sector.

TOP DEVELOPMENTS

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Hong Kong legislation requires revised nutrition labeling
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Soup label becomes more informative
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NEW PACKAGES

Hydrox makes a comeback
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Similac in rectangular container
Packaging for Similac powdered baby formula from Abbott Nutrition has been redesigned for maximal convenience. Features of the new plastic rigid container include indented sides for a one-handed grip, a hinged lid whose underside holds a scoop, rounded corners for easier scooping, and a peel-back label with additional information and a Spanish translation. The new package, available in 23.2- and 34-ounce sizes, takes up 33% less shelf space than cans of comparable size.