As prices increase for key commodities, food packaging will have to adjust its priorities.



Money talks. And in the food industry, for the past year or so, it’s been screaming.

Rising prices have dominated just about all aspects of food: growing, processing, packaging, transportation and consumption. The price of everything, from feed and ingredients to the plastic used for packaging, has been shooting up. The increases are anchored by big jumps in the two commodities important to the industry in so many ways: corn and petroleum.

Both are at all-time highs. Petroleum prices have increased more than 30% since the start of the year, while corn has more than tripled over the last few years.

The implications reach into almost every aspect of the food industry. Petroleum powers food processing and transportation, and provides the fertilizer to grow food and the plastic to package it. Corn is feed, an ingredient, a product and even a source for alternatives to plastic packaging.

These key commodities have contributed to rising food prices, which are up 5% from a year ago. The rise has been even higher for basic food stuffs such as bread (up 14% from last year), milk (up 13.5%) and eggs (up 30%).

The rise in prices has the potential to disrupt, if it has not yet actually done so, some long-term trends in the food industry. It adds more pressure on food processors from suppliers, on top of the pressure they’ve been feeling for years on the other end from retailers.

“Within the last 10 years, there’s been downstream pressure on supply chains due to increasing retailer power,” says Christopher Shanahan, research analyst for Frost & Sullivan. “With rising food prices, now you’re going to have increasing supplier power.”

As major companies like Kashi parent Kellogg get involved in organic foods, there may be a disconnect for some consumers, who associate organic products with smaller companies.

Eating at home

But the biggest potential impact of the economy on the processed food industry is a positive one: People are buying more of the stuff. Even when retail food prices are rising, eating at home becomes more attractive in tough economic times than eating out. In a recent survey by the Food Marketing Institute, 71% of respondents said they eat out less often.

Higher prices is one of the factors that will lead consumers to be more careful and rational in their food purchases, says Pat Conroy, vice chairman of consulting firm Deloitte.

“They’ll continue, obviously, to buy product, because they have to. Food’s not a discretionary item,” Conroy says. “But what they’re going to do is scrutinize much more heavily what’s in that product. How does that product differentiate itself from a competing product based upon price, ingredients, healthiness, whatever those factors are that they’re buying that product for. The companies that do a better job of helping consumers educate themselves and prove to themselves that the claims a product makes are valid, are ultimately going to be the winners.”

One possibility Shanahan sees is a resurgence of center-of-the-store, processed items. These tend to be more economical than fresh foods like dairy products and produce, in part because they have a much longer shelf life.

“I imagine there’s going to be an increase in demand for products with higher shelf life,” Shanahan says. “If the trend continues and their budgets [for food] are growing relative to their income, they’re going to start noticing more and more of the processed foods as being a better bargain.”

Retailers like Safeway have developed a sophisticated lineup of store brand products, each appealing to consumers in a unique way.

Private-label incentive

The economic situation also could change the equation between branded products and private label. The same supply factors apply to both sectors, but private label will still hold the price advantage due to its lower costs for marketing and (in some cases) transportation. That advantage could prove decisive in tough economic times.

“They’re going to switch to private label,” Shanahan says. “I don’t see that abating. Private label will continue to benefit from rising food prices.”

Private label sales in nine major food and beverage segments (milk, other dairy, bread/cereal, vegetables, sweet goods, refrigerated entrées, frozen seafood, pizza, salty snacks and carbonated beverages) grew 12% between 2002 and 2007, compared with 7% for branded goods, according to a recent report from Mintel.

Private label is strongest in commodity-type foods, with a 65% share in eggs and a 68% share in natural cheese sales in mainstream grocery stores. It’s weakest in more highly processed products like salty snacks (5% share) where strong national brands predominate.

Conroy says brands are falling short in one important aspect: innovation.

“The reason that private label is nipping at the heels of the major brands is because the major brands have not been really adept at new product innovation,” he says. “What we’ve seen over the past few years is that they’ve lived off brand extensions that aren’t really innovative, which allows private label to come in and compete on price.”

For years, private label has been eroding one of the major advantages of brands: appearance. Private-label packaging, at retailers like Safeway and Target, has long become every bit as sophisticated as that of branded products. Not only that, but some food retailers have established several complementary lines of private-label products, such as Safeway’sOOrganics line, that give consumers a choice of quality, organic status and other important attributes.

On the other hand, branded products have an important advantage over private label: more elastic margins. Specifically, brands have the option of cutting back on marketing to absorb supplier price increases without having to raise prices to the consumer. That’s much less of an option for store brands, whose marketing costs are a fraction of the national brands’.

Brands have to keep the advantage in another fundamental: taste.

“Brands are still out there because at the end of the day, taste matters,” Conroy says. “In many instances the name brands still taste better than the private-label knockoffs.” He pointed out that bad-tasting “healthier” versions of branded products ultimately flopped, because taste trumped healthiness, and it probably trumps cost as well: “They’ll just not buy something, as opposed to buying something that tastes horrible just because it’s 20 cents cheaper.”

Organic prices

Increasing food prices have the potential to make a big difference in another of the fastest-growing segments of the food industry: organic and natural foods.

Organic products have been growing at rates three to eight times higher than regular products, according to the Organic Trade Association. Growth in 2007 for organic foods and beverages was projected at 18% over 2006. (The OTA did not have final stats for 2007 as of press time.)

But organics, which already carry a premium of 20% to 100% over conventional products, are undergoing the same price pressures as regular foods. Organic Valley, the second-largest U.S. producer of organic milk, has raised its prices 8.3% since the beginning of this year.

Prices for organic foods will tend to increase due to pressures in the grain supply. A lot of organic food is based on organic grain, as either an ingredient or animal feed. As prices for non-organic grain continue to increase, farmers have less incentive to undergo the expensive, time-consuming process of converting to organic. This will constrict the supply of organic grain.

One way for food retailers, and their processor/suppliers, to keep the momentum going for organic foods may be to offer them as private-label lines. Safeway has been doing that for years with itsOOrganics line. Two other players recently announced plans to do the same thing. Unified Grocers, a retailer-owned distributor based in the West, has launched Natural Directions, a line of organic and natural food that will initially comprise 120 items,including milk, juice, cereal and canned goods. And Supervalu, the nation’s second largest traditional grocery retailer, is rolling out Wild Harvest, a line of 168 organic items ranging from dairy and eggs to crackers and salad dressing.

Kraft’s redesigned salad dressing bottle is an example of sustainable packaging that improves functionality: Its thinner walls and ergonomic shape make it easier to handle.

Consumers need proof

But whether organic and natural foods are private-label or national brands, food companies will still have to work harder to justify the price premiums for them, Conroy says: “The perception that it’s healthier isn’t necessarily enough to carry the day if you can’t prove it.”

To do that will require better communication to educate consumers, many of whom are understandably baffled by food-industry terminology. (See “Food lingo confuses British shoppers” on p.14.)

The multiplicity of nutritional claims can be confusing to consumers. Standardization comes in the form of the nutritional labels that are now required in the United States and many other countries. But studies have shown that consumers still find them confusing, especially when it comes to relating consumption habits to reported serving size.

One form of simplifying nutritional claims is to impose a standard, one-message logo across an entire product line, connoting that the product is nutritionally sound (or at least sounder than an alternative). Several retailers and food manufacturers are using such logos on their packaging, such as Frito-Lay’s Smart Spot, Unilever’s Choices and the voluntary Traffic Light system of Britain’s Food Standards Agency.

But even if they’re confused, consumers are going to want to see justification of a price premium for healthier products, whether they’re organic, “natural,” nutraceutical or whatever.

“If you’re commanding a premium for that claim, there’s enough data out there, or lack thereof, that a consumer’s going to use that to influence their buying decision,” Conroy says.“What we’re seeing is, consumers are becoming much more clinical in their buying decisions, as opposed to emotional.”

One possible change Shanahan sees is a shift away from organic to natural products. Natural products are less rigidly regulated than organic ones, which have to do without synthetic pesticides, herbicides or fertilizers. Natural products have to meet a lesser standard of “minimally processed,” making them less expensive than organics to produce.

“I think a big factor will be foods that claim to be natural,” Shanahan says. “There’s a large demand already for organic foods, but it’s easier to claim to be natural than it is to be organic. So there will be a lot of switching to natural, because a lot of consumers will say, I want to buy organic, but natural is still OK relative to [products] that are non-natural.”

Tom Vierhile, director of the Productscan unit of Datamonitor, says that as major corporations like General Mills (Cascadian Farms) and Kellogg (Kashi) get involved in organic and natural food production, the products may lose some of their allure.

“There’s a perception on the part of the consumer that organic is a small operation,” Vierhile says. “I wonder if there’s a little bit of a disconnect when consumers see the large multinational corporations going organic.”

Vierhile also agrees that rising prices may dampen enthusiasm for organic products.

“I think that organics are in a vulnerable position, and I think part of it is that there’s a lot of confusion out there right now,” Vierhile says. “Consumers do not appear as enamored of the word organic as they were two to three years ago. I think all this publicity about green this and carbon emission that has confused people.”

Sustainable confusion

Confusing publicity extends to another concept that’s taken hold in food packaging: sustainability.

The sustainability trend in packaging is taking many forms. Reduction in material, the use of recycled and/or recyclable material, and the use of “bioplastics” made from corn and other plant-based material have all attracted a lot of attention. Retailers, notably Wal-Mart, have increased pressure on their suppliers to make their packaging more “sustainable.”

Shanahan thinks that sustainability may prove to have shallow roots in tough economic times. “Sustainability is the same as organic,” he says. “It’s an intangible benefit to many consumers, and if food prices continue to go up, there is going to be a natural tendency for many consumers to put that as a secondary concern relative to being able to buy enough food for the week.”

Some companies may be tempted toward a quick-fix solution of altering a single aspect of their packaging, but that may not beenough to satisfy consumers-especially the type of “green” consumer who would be prone to paying attention to these issues in the first place.

“The thing with sustainable packaging is, it has to be part of the whole, larger picture of how the company operates,” Vierhile says. “Throwing a highly processed mass-market product into a sustainable bottle-it just seems like there’s a little bit of a disconnect there.”

Bioplastics have been getting a lot of attention, but their use for food packaging has been limited. Some of the problem is that, on their own, they lack robust barrier properties and, in most applications, they’re more expensivethan traditional resins. One of the few exceptions has been film for labels and tamper-evidence bands made from corn-derived polylactic acid (PLA). These have been used for several products, including T-E bands for Quaker Oats and Sniffers Shake-Ins, a pet food supplement from Chomp Inc.

Bioplastics have a disadvantage other than price. Some observers are questioning whether they really confer an ecological advantage when all factors are taken into account. Ethanol, the source component in most commercialized bioplastics, has been criticized on grounds that it takesmore energy to manufacture than it saves by displacing petroleum. More recent criticism has centered on the use of corn and other grains to replace petroleum in a time of rising prices and global food scarcity.

Reduction in packaging presents the most practical opportunity to make a sustainability appeal. It’s visible to the consumer and, in most cases, saves the packager money. It can also have other tangible benefits, such as making packaging easier to handle. Overpackaging is a common consumer complaint; a package with less material that is still utilitarian can be appealing because of its simplicity.

“What [consumers are] looking for is the efficiency of the package’s design, whether it’s using less [material], which quite frankly translates into more utility for a consumer,” Conroy says.

One recent example of such a package is Kraft Foods’ new salad dressing bottle. Kraft recently revamped the bottle for its entire line of salad dressing, switching from a triangular shape to one with thinner, concave walls. This not only uses less plastic, it makes the bottle easier to handle. The concave shape is more ergonomic, and the thinner walls allow the consumer to control the flow of product more easily.

Of course, packaging still needs to perform its traditional functions of shelf appeal, product protection and convenience. High prices and the drive toward sustainability aren’t even close to wiping out those factors, especially convenience, Shanahan says.

“Is it worth more for me [as a consumer] to prepare the food in the kitchen, each of the components, and use plates and then clean them, as opposed to just buying it and microwaving it?” Shanahan says. “There is a point at which people will start to switch away from convenience and the time savings relative to the money savings. Have we got to that point yet? I don’t think so in the short term. I think North America is pretty safe in terms of that not being an issue for awhile.”F&BP

FOOD LINGO CONFUSES BRITISH SHOPPERS

A recent study by Whole Earth Foods of consumers in the United Kingdom found some amusing, if slightly chilling, misconceptions about modern concepts of organic food.

More than half the respondents believed organic foods would be better for them, but 37% said they never bought them because they were confused by the lingo. Some of the more notable confusions:

•7% believe that unwashed food is automatically considered organic.

•46% think “macrobiotic” refers to a type of bacteria.

•1% think it means a tiny robot.

•13% think “sustainable” food means food that lasts longer in the refrigerator.

“We were surprised at just how widespread this underlying confusion went,” Michelle Constantinou, senior brand manager for Whole Earth Foods, toldThe Lempert Report.