Food Makers Scrimp on Ingredients
In an Effort to Fatten Their Profits
JULIE JARGON / Wall Street Journal 22aug2008
Mindfully.org: Considering that food quality from these companies is already abysmal, it would seem that it is pretty difficult to take the standards any lower without just packing offal.
Major food makers are quietly altering their recipes on candy, dairy products and other top-selling lines, adding fillers and substituting cheaper ingredients to cut costs amid the commodities boom.
Hershey Co. is substituting vegetable oil for a portion of the cocoa butter traditionally used in some of its chocolates. Spice maker McCormick & Co. is now supplying food companies with cheaper spices and new flavor blends, such as Mexican oregano instead of pricier Mediterranean oregano, and garlic concentrate instead of heavier (and costlier to ship) garlic cloves.
General Mills Inc. says that by reducing the number of spice and ingredient pouches in boxes of Hamburger Helper — and by halving the number of pasta shapes used in the product line — the company has trimmed manufacturing costs 10%. The company is also replacing pecans with less expensive walnuts in its Pillsbury Turtle cookies.
Soy protein, a low-cost meat filler long used in school-cafeteria hamburgers, is making its way into more packaged foods, says Michael Considine, an executive at Minnesota grain company CHS Inc. In the past two years, he has seen a 10% increase in the volume of soy protein the group sells to major food companies, he says.
Most of the tweaked products still cost the same for consumers, if not more. Recently, Hershey announced a price increase across most of its lines.
It's happening as food companies face pressure to raise prices to cover their own fast-rising costs. On Friday, new data showed that food companies raised prices across 35 key product categories by 7.3% over the 12-week period ending Aug. 9, according AC Nielsen. The increases are "unprecedented," Sanford Bernstein analyst Alexia Howard wrote in a note to investors.
Also on Friday, Mars Inc., maker of M&Ms candies and Snickers bars, said it's raising some prices and cutting the size of its Funsize candy packs.
Food makers face not only rising shipping costs due to costlier fuel, but also sizeable jumps in the price of wheat, sugar and other basic ingredients. The pricing pressure isn't likely to dissipate soon: It is driven at least in part by growing demand for meat and milk in developing countries as living standards rise. In addition, government incentives are resulting in more corn being made into ethanol, cutting into the corn available for cooking or livestock feed.
Food-commodity prices had retreated somewhat in July, but on Friday, the Dow Jones AIG Agricultural Sub-Index, which charts futures prices of crops ranging from corn to coffee, closed 7.7% higher for the week. That was its largest weekly change since the early months of the two-year-old rally in farm-commodity prices.
Food companies and their suppliers say the changes they are making don't sacrifice quality, flavor or nutrition. General Mills of Minneapolis says consumers liked walnuts just as much as the pricier pecans it removed from its Turtle cookies. That change, as well as a decision to mix chocolate chips into some Pillsbury cookie dough rather than sprinkle them on top has saved more than $5 million in annual costs, says spokeswoman Heidi Geller.
The chief executive of spice maker McCormick, Alan Wilson, says that "through alternate ingredients and flavor technologies, we're helping food companies replace high-cost ingredients with low-cost ones while maintaining the same quality."
Still, swapping out ingredients for cheaper ones has the potential to alienate consumers already stretched by high gasoline prices and a weak economy. In a cost-cutting effort in the 1990s, Campbell Soup Co. reduced the amount of meat in its chicken noodle soup. Consumers noticed and sales suffered, says Ms. Howard of Sanford Bernstein. After the episode, a new chief executive at Campbell vowed not to cut corners like that again.
Taste can be a concern, too. While food makers say the changes don't alter the flavor of their products, "the risk of tweaking formulas too much is that slowly and almost imperceptibly, you gradually alter the taste ... so that after five alterations, you have something that tastes different than it did five years ago," says Robert Moskow, a food-industry analyst with Credit Suisse.
Other companies are gussying up lower-end products to make them more appealing. Cargill Inc., of Minneapolis, in July introduced to supermarkets cheaper cuts of meat with fancy-sounding names like Maranada steak (flank steak), Marbello steak (skirt steak) and Cordelico sirloin (flap meat). These cuts come from less tender regions of the cow, unlike pricier cuts such as filet mignon, which comes from the tenderloin muscle.
In a press release announcing the new cuts, Elizabeth Desbien of Cargill said that the "newly positioned, mid-priced products allow retailers to provide another option to their customers who love beef, but who may be more price-sensitive."
Restaurants, too, are fiddling with their dishes. Sysco Corp., the nation's largest food-service company by sales, has been working with restaurants to make cost-saving changes such as replacing butter with oils that are blended with butter.
This month, McDonald's Corp. said it's testing less expensive ways to make its $1 double cheeseburger; already, some restaurants are selling the burger with one slice of cheese instead of two. And in a Thursday interview, Burger King Holdings Inc. CEO John Chidsey said the chain is testing a smaller Whopper Jr. hamburger as it tries to overcome high ingredient costs.
Food companies frequently change their recipes in response to health trends and changing consumer tastes. Most of the recent alterations generally can be spotted only in the fine print of the package's ingredient list. That stands in contrast with manufacturers' practice of occasionally touting changes that, say, add fiber or whole grains with prominent "heart healthy" promotional language on the packaging.
While some of the recent changes do appear to result in healthier products, others don't necessarily. Walnuts, for instance, contain more protein and less fat and calories than pecans, says Russ Barker, president of the Peanut & Tree Nut Processors Association, citing U.S. Department of Agriculture data.
But studies have shown that cocoa butter can reduce inflammation and lower blood pressure, so while substituting vegetable oil may not be harmful, it lowers the overall health benefit, says Bonnie Taub-Dix, a spokeswoman for the American Dietetic Association and a nutrition consultant in New York.
Hershey spokesman Kirk Saville declined to comment on Ms. Taub-Dix's assessment. He pointed out that the majority of Hershey products are made with pure milk chocolate, of which cocoa butter is a primary ingredient.
Packaged-food companies that started trimming costs before the grain-price rally began two years ago tend to be faring better than rivals today. Pittsburgh ketchup giant H.J. Heinz Co. has been breeding sweeter tomatoes in an effort to reduce the amount of high-cost corn syrup in its ketchup. The sweeter tomatoes aren't yet being used in its product lines.
Heinz is also cutting back on packaging and using more rail delivery to cut transportation costs. On Thursday, Heinz said earnings in its fiscal 2009 first quarter rose 11% to $229 million. General Mills and Kellogg Co. also have benefited from aggressive cost-cutting: Their stocks have risen 27% and 9.3%, respectively, in the past two years.
Some companies are altering ingredients on such a small level that most consumers would never notice. Spokeswoman Nicole Reichert says Cargill has seen increased demand from food makers for dairy substitutes such as enzyme-modified dairy ingredients and starches and hydrocolloids. Starches and hydrocolloids are thickening and stabilizing agents that can replace costlier ingredients like nonfat milk solids in ice cream, processed cheese, yogurt, sour cream and dairy drinks. Adding enzymes to dairy ingredients can substitute milk or cream in some products.
From a nutrition perspective, "That's not a comparable replacement at all," says Ms. Taub-Dix of the American Dietetic Association. "What makes dairy so wonderful is its calcium content and other nutrients. Once you start substituting that, you're changing the nature and benefit of the product."
Cargill's Ms. Reichert agrees that such changes can lead to a reduction in a product's vitamin and mineral content, but says they also reduce the fat and calorie content. "Because applications such as cookies and cream sauces are typically not major sources of vitamins and minerals to begin with, one has to weigh the benefits of reducing calories against the impact of a slight reduction of vitamins and minerals," Ms. Reichert says.
Another ingredient supplier, NutraCea Inc., a small publicly traded company based in Phoenix, reports seeing an increased demand from food makers for its rice bran, a rice-milling byproduct that until about 20 years ago used to be fit only for animal consumption. Rice bran is the outer layer of the brown rice kernel that remains after the husk has been removed.
The company sells stabilized rice bran to U.S. bread and cereal makers, and as a meat enhancer to food companies in Asia. The company says its rice bran is a healthy meat enhancer because it's fat-free, contains protein and can replace other meat fillers such as starch and mustard flour.
—Scott Kilman contributed to this article.
source: p.A1 22aug2008