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By Jeremy Glaser | 02-17-2011 03:59 PM

Rising Commodity Costs Put Consumer Firms in a Bind

Competitive pressures are making it hard for firms to raise prices to recoup higher costs, but investment opportunities in the sector remain, says Morningstar's Erin Lash.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser.

Ahead of the largest consumer goods conference, CAGNY, I am here with Erin Lash; she is an equity analyst at Morningstar. We'll take a look at some of the themes that she thinks are going to be at the conference, and if there are any opportunities in the consumer product space right now.

Erin, thanks so much for taking the time today.

Erin Lash: Thank you for having me.

Glaser: So let's start off big picture. What are some of the big ideas that you're expecting to hear from a lot of these companies over the course of the week?

Lash: One would be related to competitive pressures. Obviously, over the past year consumers have been strained, and so promotional spending has really picked up intensity. However, input costs are going up, and so at this point in time consumer product companies are really faced with a challenge, whether they actually lower prices further to drive volumes or maintain volumes. Or whether they actually raise prices to offset some of the pressures that they're seeing with regards to commodity costs.

Glaser: One of the things we hear from our analysts who cover the retailers is "private label, private label, private label," and the idea that consumers are going to store brands. Is that part of the competitive pressure landscape or is it more competing amongst the branded products?

Lash: Private label is obviously, more of a force to reckoned with today than it was five, 10 years ago. Retailers such as Wal-Mart, Costco, Kroger have really been investing behind their private label brands, and so you've seen an improvement in the quality or at least the perception of quality from a consumer's perspective.

So, branded manufacturers really have to take into account the price gap, the level of their prices versus private label. And that's definitely a serious consideration when they're deciding whether to increase the prices on their products and the effect that that could have on their volumes if consumers trade back down to private label offerings.

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