Best bits: Cuts central to recipe for earnings growth

As quarterly results from the world's listed food makers rained down upon us last week, industry watchers waited for any signs of confidence about the economic outlook.

Companies as varied as Kraft Foods and Fresh Del Monte in the US, Orkla and Kerry Group in Europe and Morrisons in the UK announced their latest numbers to the market - and analysts were busily looking for trends to pull from the balance sheets.

There were continuing indications of the strength of private label in the US, a market where store brands have traditionally found it tough to gain traction. Since the downturn, own label has found favour among cash-strapped shoppers and, although there are signs of economic recovery in the US, consumer confidence remains fragile and store brands remain popular.

Private-label manufacturer TreeHouse Foods again went public with its confidence in the potential for store brands in the US after posting a 28% jump in first-quarter profits. The improved earnings were boosted by sales from recent acquisition Sturm Foods but TreeHouse also moved to lift its profit target for 2010, an indication of their bullishness about own label.

Pasta supplier American Italian Pasta Co. (AIPC) made similar noises last week - despite a fall in quarterly sales and earnings. President and CEO Jack Kelly said AIPC, which has come through a challenging three years that include a probe into its finances, was focusing on store brands and was "outperforming" the rest of the pasta category.

With private-label suppliers insisting the outlook for their sector is rosy, the onus is falling on the big brand-owners to fight hard on price, which is weighing on top-line growth. Sara Lee booked flat third-quarter sales last week, with the company admitting that the North American fresh bakery sector, which accounts for 20% of group sales, remained "competitive". However, Sara Lee said its "improved operational performance" meant the company could raise its own earnings forecast for the full fiscal year.

And there lies the key to some of the strong earnings growth we have seen reported in recent weeks. With commodity costs low and competition fierce, food makers are finding it tough to drive profits by boosting prices and therefore sales revenues. Instead, as the likes of Orkla and Kellogg have shown, earnings growth is coming through cost cuts and efficiency gains.

Lower food prices have also taken some of the buoyancy out of the sales at Morrisons, which, for the last two years, has been the fastest-growing major UK grocer. Last week, shares in Morrisons slipped after the company reported slowing sales in its fiscal first quarter. "Commodity prices have continued to ease, resulting in the virtual elimination of food inflation and lower market growth," Morrisons said, prompting some City analysts to take a swipe at the retailer's performance.

This week, Sainsbury's publishes its preliminary results for the year to 20 March. Will the UK's number three grocer have seen a similar slowdown in sales to that seen at Morrisons?