6/16/2008

The Wall Street Journal

NEW YORK -(Dow Jones)- Kellogg Co. (K) is hiking cereal prices for the second time in six months, becoming the latest food company to use price increases to offset soaring prices for grains and oil.

Inflation - particularly food inflation - has become a key concern for policy makers, businesses and consumers around the world. Government data on Friday showed that U.S. consumer prices rose sharply last month. The May consumer price index data showed that food prices rose 0.3% after rising at nearly a two-decade high in April.

As the surge in commodity prices has trickled down to consumers, they have been forced to spend more on groceries and gas, leaving less for discretionary spending like apparel shopping and eating out.

Kellogg spokeswoman Susanne Norwitz said the company reduced the sizes of " select" ready-to-eat cereal boxes. In the current environment, where commodity costs are soaring, some food companies are cutting the size of their boxes as an indirect way of raising prices.

Norwitz said that on average cereal box sizes were reduced by 2.4 ounces, which amounts to a low to mid-single digit price increase. Froot Loops, Cocoa Krispies and Apple Jacks were among the cereals affected. Kellogg began rolling out the reduced sizes June 2 to retailers, Norwitz said. Kellogg had already hiked cereal prices in January. At that time the average wholesale price increase across Kellogg's product portfolio, including snacks and cereals, was in the low to mid-single digit range.

Longbow Research food analyst Alton Stump noticed Kellogg's box size reductions. In a survey of Wal-Mart stores, he found that the box reduction strategy by Kellogg has gone virtually unnoticed by consumers. Stump says that a similar strategy by General Mills Inc. (GIS) was successful and delivered price improvement of 2% to 4% for the company.

Food companies have raised prices for everything from bread to cheese. In February, for instance, Sara Lee Corp. (SLE) announced price increases on its bread products, the fourth such increase in roughly a year. For the packaged- food companies, the price hikes could limit further erosions of profit margins - to the extent that consumers aren't driven to cheaper alternatives. For consumers, the price increases add inflationary pressure at a time of growing economic uncertainty.

Shares of Kellogg recently were up 11 cents at $51.86.

-Anjali Cordeiro; Dow Jones Newswires; 201-938-2408; anjali.cordeiro@ dowjones.com