NEW YORK (AP) — Investors shouldn't worry that weak cereal pricing will last because top producers like Kellogg Co. and General Mills Inc. will likely raise prices later this year, and retailers will have no choice but to accept it, an analyst said Monday.
Credit Suisse analyst Robert Moskow told clients in a note Monday that breakfast cereal has been the "golden child of the food industry" in the past several years because of its better-than-average sales trends, ability to maintain prices and improvement in operating margins.
But investors have worried lately because retail pricing is falling as cereal makers offer more promotions for retailers. Stores increasingly want lower pricing from brands to drive traffic and spur sales, but Moskow said that's not likely to last because the stores need the brands to keep attracting customers.
Cereal makers like General Mills and Kellogg "have built a stronger foundation of trust and respect over the years than any other food category we follow," Moskow said.
That means it will be tough for retailers, including Wal-Mart Stores Inc., to try to get price cuts as they negotiate what to carry in their stores.
Wal-Mart's sales have been hurting, so the retailer needs brands now to get shoppers in and spending, Moskow said.
"We think the brands have a little more leverage than they had a year ago when Wal-Mart was making a big push" to promote less expensive, private labels and cutting products from its store, he said.
Pricing fell slightly in the first half of the year, but by the end of the year prices should be up on a year-over-year basis, the analyst said. Moskow predicts pricing will rise 2 percent in 2011.
He rates General Mills and Kellogg "Outperform."
Shares of Kellogg rose 30 cents to $54.38 in afternoon trading, while shares of General Mills added 32 cents to $72.04.