• by Karlene Lukovitz  @KLmarketdaily, February 4, 2009

Even food manufacturers--normally fairly insulated during recessions--felt the pinch in the last three months of 2008.

Kraft saw net revenues rise 6.2% to $10.8 billion for its fourth quarter '08, mostly as a result of its LU biscuit business acquisition. But operating income plummeted 68.5% to $302 million, and earnings per share dropped 71% to 11 cents (versus 38 cents in Q4 2007).

Kraft hedged input costs earlier in 2008, expecting prices to continue to rise--but prices instead declined significantly in last year's second half, notes Christopher Shanahan, research analyst, chemicals, materials and food for marketing research firm Frost & Sullivan.

In addition, the economy and price increases to cover materials costs combined to drive down consumer demand, particularly in international markets. International net revenue grew by 14.6% and organic revenue grew 7.4%, but operating income dove 100%.

Kraft's average price increase of 7.3% was not overly aggressive compared to other large food companies--price increases ranged from 5% to 15% during the quarter, Shanahan noted. However, consumers' shift to buying on an as-needed basis drove volume declines.

In the U.S., cheese products and convenient meals saw net revenue grow 3.3% and 10.7%, respectively, and operating income jump 100% and 9.5%, respectively. Grocery's net revenue grew 2.2%, but operating income dropped 16.7%. Beverages and snacks lost 2.2% and 0.7% in net revenue and 81% and 52.9% on operating income, respectively.

For full-year 2008, Kraft experienced volume declines across products: -6.7% in cheese, -3.5% in groceries, -3.8% in beverages and -3.1% in snacks, points out Shanahan.

Nevertheless, Kraft's full-year performance was solid. Total net revenues rose 16.8% to $42.2 billion, and organic revenues grew 6.6%. Net earnings rose 12% to $2.9 billion.

In the U.S., net revenues rose for convenient meals (8.6%), cheese (7%), grocery (3%) and snacks (3%). North American food service net revenue gained 5.2%. In total, North America gained 4.7%, and international, 37.6%.

Marketing, administrative and research costs declined 17.1% for the year, to $8.7 billion. However, chairman/CEO Irene Rosenfeld emphasized that Kraft would continue to invest operational cost savings in enhancing branding efforts, brands' quality propositions, and sales capabilities.

At Sara Lee, Q2 fiscal 2009 saw net sales decline 2% to $3.3 billion. The company lost $17 million for the quarter versus $182 in net income for Q2 fiscal 2008.

Strong net sales in North America, particularly in the retail and fresh bakery segments (up 8.4% and 10.6%, respectively), were more than offset by declines in international business.

Overseas, lower demand as economic conditions worsened was exacerbated by unfavorable foreign currency exchange rates. Net sales decreased for international beverages (-6.9%), bakery (-16.4%) and household and body care (-15.7%).

For the first six months, net sales rose 3.5% to $6.7 billion, and adjusted net sales rose 5%. Diluted EPS was 30 cents versus 53 cents for first-half fiscal '08. However, excluding significant items, EPS was 52 cents, compared to 50 cents in 2008's first six months.