CHICAGO (AP) - Soaring prices for the ingredients that go into cheese and cereal ate into profits at food manufacturers Kraft Foods Inc. and Kellogg Co., both of which posted lower fourth-quarter earnings Wednesday.
Kraft, the country's biggest food and beverage maker, said its profit fell 6 percent as price hikes failed to fend off across-the-board increases in commodities costs, which rose 40 percent for dairy products alone.
Meanwhile, Kellogg, the No. 1 U.S. cereal maker, saw its earnings dip 3.3 percent, due partly to higher energy and materials costs and a record-setting investment in advertising.
At Northfield-based Kraft, which makes its namesake cheeses, Maxwell House coffee and Oscar Mayer deli meat, Chief Executive Irene Rosenfeld said the company raised prices but was unable to absorb the higher costs of its ingredients. That dramatically cut into some division margins, slashing the operating profits in Kraft's North American Cheese and Foodservice unit by more than 53 percent.
'The biggest surprise was the unprecedented high dairy costs and the fact that they remained at these high levels through year-end,' Rosenfeld said.
Kraft said it's faced with record cost levels for nine of its 11 largest commodities, including wheat, cocoa and soybean oil. All three cost 'significantly' more than their average costs in 2007, said Chief Financial Officer Tim McLevish.
'Because of this, we have taken and are taking pricing actions as well as focusing on overhead costs to ensure the expansion of operating margins in 2008,' he said.
Analysts said they were concerned that Kraft seemed so ill-prepared for the higher-than-anticipated prices, since grain and dairy costs have been rising for months.
'A 53 percent decline in operating profits is just an absolutely astounding number,' said Citigroup analyst David Driscoll.
At Kellogg, which makes Rice Krispies cereal, Eggo waffles and Keebler cookies, higher fuel, energy, commodity and benefit costs hurt profits. Earnings fell to $176 million, or 44 cents per share, for the quarter ending Dec. 29. During the year before, the Battle Creek, Mich.-based company earned $182 million, or 45 cents per share.
Kellogg spokeswoman Kris Charles says the company wouldn't get into the specifics about what food ingredients -- whether it's grains, edible oils, sugar -- that it's now paying more for.
The company's revenue rose 8.1 percent to $2.79 billion from $2.58 billion, benefiting partly from stronger net sales by the international division.
The results matched Wall Street forecasts for earnings of 44 cents per share on $2.74 billion in revenue. The analysts' earnings estimates typically exclude one-time items.
To offset rising costs, Kellogg raised prices across many of its brands in January and pursued various productivity initiatives, Kellogg's top executive said.
'Despite the volatility, we remain confident in our ability to deliver another year of sustainable, dependable growth,' Chief Executive David Mackay said during a teleconference with industry analysts.
Kraft said more price hikes are expected, which could cause headaches for consumers as the nation's economic slowdown continues.
Rosenfeld said Kraft was continuing to shore up its reputation among shoppers in hopes of convincing them to buy Kraft products instead of cheaper, off-label brands -- something that will be increasingly important for brand-name food companies if the U.S. enters a recession.
'I think the most significant impact (in a recession) is that we'll see more people eating at home than away from home. And within that, I feel very good about the progress we've made in rebuilding our brand equity,' Rosenfeld, who is leading an effort to shed slow-growing units to better focus Kraft's massive stable of products, told The Associated Press. 'Our focus is continuing to ensure the brand value of our brands is worth paying for.'
At Kraft, net income for the quarter fell to $585 million, or 38 cents per share, for the three months ending Dec. 31. That's down from $624 million, or 38 cents per share, during the same period last year. The 2007 per-share result was based on 90 million fewer shares outstanding.
The company, which also was hurt by one-time costs, also said it expects earnings per share of at least $1.90 for this year, excluding restructuring costs. Analysts had anticipated profit of $1.94 per share.
'In our view, this outlook is very disappointing and will come to some investors as a surprise, as the 'bulls' were looking for dairy costs to be a positive in 2008,' Driscoll wrote in a research note to investors.
Excluding asset impairment and other costs, the company earned 44 cents per share, matching estimates of analysts polled by Thomson Financial.
Revenue rose 11 percent to $10.40 billion from $9.37 billion in the fourth quarter of 2006. Analysts predicted revenue of $10.05 billion.
Kraft shares fell 74 cents, or 2.5 percent, to $29.45 Wednesday. Kellogg shares fell 51 cents, or 1 percent, to $49.11.
AP Business Writer James Prichard in Grand Rapids, Mich., contributed to this report.
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