Store Brands Drive Price Fall

Finally, months after prices of commodities and energy started to fall from their historic highs, and months after grocers started to put pressure on food producers, there are some signs that retail food prices have begun to fall.

As often happens, food companies that had quickly raised prices to meet higher costs were hesitant to reduce prices when their costs fell. There are some good reasons for this. While prices of grains and oil have fallen sharply in trading pits, it can take months for the lower costs to make their way through the system. And you can hardly blame a business for charging as much as it can get for its goods.

In recent months, though, grocers have been complaining loudly and publicly in a way they haven't done before. They are able to do so, effectively, thanks in part to the market power they have achieved largely through their aggressive development of store brands, or "private label" products.

So if ConAgra, say, refuses to reduce its prices, grocers are able to offer their own, lower-cost alternatives, many of which are as good as the products ConAgra (or Kraft, or Unilever, or Heinz) sells. ConAgra reported Thursday that, while its sales rose more than 6 percent in its third quarter, sales volume fell by 4 percent, showing that consumers continue to seek out lower-priced alternatives. Other brand-name food producers have seen similar volume declines.

"The pricing window that opened for packaged-food companies last year is now closed," wrote Robert Moscow, who analyzes the food industry for Credit Suisse, in a research note.

Even worse for the big food producers, there is some indication that, even when the recession is over, many consumers will stick with private labels.

"It's clear," said Janet Eden-Harris of J.D. Power and Associates, "that consumers have begun to discard the idea that private label brands are of lower quality than traditional brands, which provides an opportunity for retailers to differentiate themselves with high quality, reasonably priced store brands."

Prediction: More big food companies will muscle their way into the private-label business. Just 6 percent of ConAgra's sales come from that segment—lots of room for growth. The margins are much narrower, of course, but any company that wants to keep market share will have to dive in.