Nestle and Sara Lee profits lifted by price increases

By Brad Dorfman

CHICAGO (Reuters) - Nestle (NESN.VX: Quote, Profile, Research), the world's largest food company, reported a first-half profit at the top of analysts expectations, aided by price increases that offset rising commodity costs.

A similar strategy also helped U.S. foodmaker Sara Lee (SLE.N: Quote, Profile, Research) post a higher-than-expected profit on Thursday as it raised prices to offset soaring costs for items such as wheat and energy. Sara Lee also forecast profit for the current fiscal year that is higher than some analysts' estimates.

But investors are concerned that, as price increases for well-known brands such as Nescafe coffee are pushed through to the supermarket shelf, more consumers will look to lower- priced items. Reliance on price increases has already pressured the volume of products sold by some companies.

"We believe it would be premature to call this a turning point for the company," JPMorgan analyst Terry Bivens wrote in a note to clients on Sara Lee.

"Going forward, the company will face competitive pressures, pricing elasticity and tougher comps. All of these factors may blunt its volume growth."

Sara Lee shares fell 3.7 percent on the New York Stock Exchange, adding to a nearly 10 percent drop to date in 2008. Nestle shares rose 0.1 percent on the Swiss stock market after trading lower earlier and are down 9.3 percent for the year.

Sales volume growth in the first half of the year at Nestle slowed to 3.5 percent from the first-quarter's rate of 4.5 percent.

European foodmakers such as Nestle and Unilever (UNc.AS: Quote, Profile, Research)(ULVR.L: Quote, Profile, Research) have seen their stocks pressured because of concerns that price increases had gone too far. In contrast, U.S. food companies have in general seen their shares rise in recent weeks as a similar strategy, and cost cuts, succeeded in offsetting commodity costs.  Continued...