Beyond Gasoline

Katrina likely to affect food and beverage prices, too

OAK BROOK, Ill. -- The effect Hurricane Katrina had on retail gasoline prices was almost immediate. Not so quick to move, but certainly likely to increase as a result of the storm that battered the Gulf Coast, are food, beverage and possibly even tobacco prices.

Manufacturers face impacts from Katrina in the form of higher energy and packaging costs, wrote food analyst David Driscoll of Citigroup, New York. In addition, some manufacturers with factories near the Gulf Coast saw damages that have slowed production. CSP Daily News looks at who's most likely [image-nocss] to be affected.

We believe Katrina hurt [Anheuser-Busch] the most, given that the Southeast and South regions represent more than 35% of sales, wrote New York City-based UBS Investment researcher Nik Modi of the initial result of the storm; however, Modi added that all beverage companies will feel the effect over the coming months.

We expect input costs to increase over the next 12 months, partly due to supply disruptions related to Hurricane Katrina, he wrote. According to our contacts, PET [plastic] prices have risen over 20% after Katrina led to capacity shortages and higher costs, which could flow through to the bottlers. PET and gas prices should impact Coca-Cola Enterprises, Pepsi Bottling Group and Cott Corp., while natural gas is likely to impact A-B and Molson Coors.

Both Coca-Cola and PepsiAmericas operate facilities in the New Orleans area that sustained minor damage and power outages following Hurricane Katrina. Production from those plants was expected to be diverted to other facilities as necessary until the plants are running at full capacity.

Food and snack-maker Kraft Foods also could see some cost increases, according to Driscoll. We believe Kraft has the greatest energy exposure, he wrote, but will likely benefit in coffee as 50% of its key competitor's [Folgers] coffee is made in New Orleans. [The amount of] damage is not clear, but inventories and production could be impaired, which would likely give a volume boost to Kraft's Maxwell House business.

The hurricane that came ashore August 29 had little effect on tobacco manufacturing facilities; however, tobacco analyst Bonnie Herzog of Citigroup, New York, said she does expect some shipment dislocation for the manufacturers this quarter.

Between these issues possibly raising costs for products and consumers already reeling from $3-a-gallon gas prices, New York City-based Morgan Stanley analyst Bill Pecoriello said retailers can likely expect some sales to drop off.

Gas prices about $3 a gallon, or 70% about a year ago, could weigh on consumer demand in the medium term, he wrote. Categories and companies with larger exposures to low-income consumers could see the greatest impact: soft-drink bottlers because of their reliance on the convenience and gas channels to drive profits; [A-B because it] is over-indexed to low-income consumers. Also, consumer acceptance of price increases [for diapers, batteries and detergents] could be low.

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