U.S. retailers forcing food companies to innovate

By Emily Kaiser

CHICAGO (Reuters) - Powerful grocery chains are calling the shots in the U.S. food sector, pushing manufacturers to come up with new products catering to an increasingly health-conscious population, industry executives said this week at the Reuters Food Summit in Chicago.

From Wal-Mart Stores Inc.'s (WMT.N: Quote, Profile, Research, Stock Buzz) aggressive push into organics, to Safeway Inc.'s (SWY.N: Quote, Profile, Research, Stock Buzz) recently launched store-brand organics line, healthy is hip, and retailers are clamoring for more products.

Companies that cannot meet the demand for innovation have virtually no power to raise prices -- a particularly sticky situation in a slow-growth sector dominated by notoriously tough negotiator Wal-Mart.

"The balance of power has permanently shifted (from manufacturers to retailers)," Wesley Moultrie, senior director of the food, beverage and tobacco team for Fitch Ratings, told Reuters at the summit.

"The only way you gain any type of power is if you introduce a new product that you get a pricing premium off of that's actually demanded by consumers," he said. "That's the only way you ... shift it back ... but that's only on a temporary basis."

Consolidation in the U.S. grocery sector has left only a handful of players that increasingly demand lower food prices, piling pressure on manufacturers who are grappling with rising costs for transport, packaging and raw materials.

WAL-MART GOES ORGANIC

Wal-Mart, the world's biggest retailer and the top U.S. seller of groceries, told Reuters this week that it was ramping up its organic business and will have doubled its offerings in the next few weeks.

The retailer expects suppliers to be ready.

DeDe Priest, who was named head of Wal-Mart's dry grocery business in December, said she met with 15 CEOs from the top packaged food companies in her first week on the job and stressed the importance of organics.

Companies have already responded with everything from organic baby food to ketchup, and they have more in the works. Indeed, analysts expect organics to be one of the biggest categories for new product introductions this year.

Grocer Safeway announced a new line of organic products called "O" in 2005, and said last week that it had more than 150 products under that label.

The shift toward healthier foods comes as U.S. consumers worry about health issues such as childhood obesity and diabetes. A majority of U.S. consumers now buy at least some organic food, although it remains a small slice of the market.

Unilever Plc (ULVR.L: Quote, Profile, Research, Stock Buzz) (UNc.AS: Quote, Profile, Research, Stock Buzz) recently introduced organic Ragu pasta sauce, and sees more opportunity to get healthier.

"I think consumers are demanding that we get less processed in general in everything that we do," said Michael Polk, Unilever's U.S. chief.  Continued...