2008: first reported decline in US food spending

In 2008's fourth quarter, consumer spending on food fell at an inflation-adjusted 3.7% from the third quarter, according to data from the Commerce Department's Bureau of Economic Analysis. That is the steepest decline in the 62 years the government has compiled the figure.

The report is based on receipts from a sampling of food-oriented businesses across the country. Consumers have cut back sharply on food spending, shunning restaurants, opting for generic products over brand names, trading in lattes for home-brewed coffee and shopping for bargains. That is hurting sales and profits at many food processors, grocery chains and restaurants.

The big drop likely comes from two things, said Joseph Carson, an economist who worked at the Commerce Department in the 1970s. First, consumers have been trading down to lower-priced items. Second, he thinks many households dug into their pantries for staples rather than going to the store, a trend that can't continue indefinitely. "You can't contract at this rate for long," he said. "It's just shocking."

"In recent years, a lot of discretionary income has gone into buying fancier food, whether it's Starbucks coffee or prepared dinner or restaurant meals," said Barclays Capital economist Ethan Harris. Now, he said, that trend seems to be waning.

Last week, Kraft Foods Inc. lowered its earnings forecast for the year, saying customers are cutting back purchases of snack foods and trading down to private labels. Groupe Danone SA said this week that U.S. consumers sharply trimmed their purchases of yogurt and other dairy products at the end of last year.

Even makers of chocolates are worried about how well their products will sell for Valentine's Day on Saturday.

On Tuesday, Citi Investment Research warned of a "modern-day price war" based on Wal-Mart Stores Inc.'s plan to freshen up its Great Value private-label foods and the analyst's expectation that it will trim national-brand prices. That could force grocery stores to cut prices to compete.

US sales of private-label food rose 10% in 2008 from 2007, to $82.9 billion, according to a spokesman for the Private Label Manufacturers Association, citing Nielsen grocery-sales numbers. At the same time, branded food products saw sales rise 2.8% to $416.6 billion, he said.

When times get tough, restaurants are one of the first places where people economize. In its quarterly surveys, research firm WSL Strategic Retail has found that more people are preparing food at home, eating at lower-priced restaurants when they do eat out and picking less pricey items from the menu. Declining sales at established locations have forced Starbucks, Ruby Tuesday and other chains to shut hundreds of outlets and put many independent restaurants out of business.

The shift has a silver lining for some companies. While supermarkets passed along last year's high ingredient costs to customers, McDonald's and other fast-food chains absorbed some of the expense and kept many items priced at $1. Now, some consumers consider a fast-food meal a bargain. On Monday, McDonald's said same-store sales rose 7.1% in January, including a 5.4% increase in the US. (info from The Wall Street Journal)