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Meiji, others savor bigger margins from price hikes

TOKYO -- Japanese food manufacturers are enjoying earnings boosts from price increases, prompting investors to take a second look at these companies.

     Meiji Holdings is on track to achieve an operating margin of 5% this fiscal year, two years sooner than targeted in its medium-term plan.

     Megmilk Snow Brand and Nichirei are also improving margins. These companies have successfully raised prices to more than offset higher ingredient costs, brought on partly by the weaker yen. The food industry had long suffered slim margins but its earnings structures are changing now.

     Meiji's operating profit is seen rising 29% on the year to a record 66.5 billion yen ($535 million) this fiscal year. The drivers are brisk sales of such hit products as the probiotics-rich R-1 yogurt and price hikes.

     The company raised prices of yogurt and cheese products in April, and those of chocolate items in April and July. This fiscal year, ingredients and other costs are seen increasing by 10.7 billion yen but price increases and cost cutting efforts will likely push up profit by 14.8 billion yen.

     Morinaga's operating margin is also seen reaching the 5% mark, up 1.7 percentage points from last fiscal year. Price hikes on ice cream, chocolate and other products are expected to push up profit by a little over 2 billion yen.

     Food makers long could not raise prices even if they wanted to. The operating margin of food companies listed on the Tokyo Stock Exchange's first section had risen to a mid-4% range through fiscal 2010, due partly to price hikes linked to a surge in grain prices. But weakening consumer appetite and a shift to cheaper products squeezed food companies' earnings thereafter.

     Now, with consumers' deflationary mindset fading, dairy and snack producers have been able to raise prices without hurting sales volume. In fiscal 2015, Japanese food makers' operating margin is likely to rise to about 4.7%, the highest since fiscal 2000.

     Whether the whole industry can succeed in price hikes is unclear, however. House Foods Group, for instance, saw sales decline after it raised prices in February for curry roux and other items. Fewer discount offers at stores appear to have exacerbated the pain that consumers felt from the price increases.

     Instant rice soup seasoning maker Nagatanien Holdings and Bull-Dog Sauce also saw sales fall after price hikes. The shelf life of a food item appears to be a factor in consumers' response to price increases.

     Overall, Japanese food maker stocks are receiving better assessments by investors. Food companies have come to account for 4.6% of the TSE's first section in market capitalization, up nearly 2 percentage points from a decade ago. Meiji's market cap has grown 130% since the summer last year, before the string of price hikes was announced. Morinaga's market cap has increased 190% over the same period. "Now is the time to change the earnings structure," says Morinaga President Toru Arai.

     As the yen's softening runs its course, food makers are once again facing increasing pressure from retailers to cut prices. They are at a crossroads in the quest to improve margins.

(Nikkei)

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