Saturday, April 24, 2004

Hormel Foods signals that it’s time to raise prices   Hormel Foods, a top US meat supplier has announced it will raise prices of its non-refrigerated packaged foods (Spam, Hormel Chili, Dinty Moore beef stew) by between 4.5% and 6.5%. It’s the company’s first price jump since 2000.   That would seem to be minor news (except to Spam-lovers). But the title of an April 20 Wall Street Journal article tells it all: “Hormel Foods to Raise Prices: Rest of Industry Could Follow.” This is a classic case of signaling in the food oligopoly, Hormel is the first to break the price rise logjam, fueled by low inflation and recession. As the article puts it, “Hormel’s move likely sets the stage for other big food companies including General Mills Inc., Kraft Foods Inc., and Kellogg Co., to raise prices.”   As an analysts explains “If you end up kind of going in unison, it tends to be less of a negative impact.”  The price hikes are partly based on the increased cost of commodities thanks to temporary shortages.   From an economic view, this is like the first few chinks in the dam giving way.  After long suppression, most businesses are eager to see an opportunity to raise prices. In industries where an oligopoly exists, there can be little worry that a serious competitor will undercut the new price levels. After all, the little bit of market share gained can’t compare to the guaranteed added cash from an across-the-board rise in prices.   The companies in question did not have to get into a secret meeting to set new prices.  They sill signal their assent to Hormel’s price rises by doing the same themselves. If major competitors decide to refuse to play (doubtful), Hormel will likely reverse its course,     2:04:22 PM

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