In the spotlight: ConAgra's belief in future of US private label
It has taken over a year for ConAgra Foods, the US food group, to get its man and one can understand the satisfaction it had this week in announcing to the market it had struck a deal to buy private-label manufacturer Ralcorp Holdings.
Fourteen months after ConAgra threw in the towel and walked away from Ralcorp after having a number of takeover bids rejected, CEO Gary Rodkin was able to tell the industry it had secured agreement from its target and was set to become the largest own-label player in the US.
The acquisition of Ralcorp, Rodkin said, was an "exciting step" for ConAgra that would make it one of the "most attractive" suppliers in the US market.
The deal apparently had the support of the investment community, even if it means ConAgra takes on more debt and will issue up to US$350m in equity to help finance the transaction. ConAgra's share price increased on Tuesday, the day the deal was announced and Wall Street analysts, in the main, welcomed the acquisition.
Janney Montgomery Scott analyst Jonathan Feeney said he was "impressed" with the "solid rationale" underpinning the deal. Erin Lash, at Morningstar, argued Ralcorp was a "great strategic fit" for ConAgra. Heather Jones, analyst at BB&T Capital Markets, said the deal would create a "venerable food manufacturer across all channels".
However, there were some concerns among analysts. On the conference call to discuss the deal, KeyBanc Capital analyst Akshay Jagdale questioned whether ConAgra's investors would see the benefits of buying Ralcorp on its bottom line. Jagdale argued the recent financial performance of Ralcorp and another listed pure-play private-label firm TreeHouse Foods had showed "non-existent" organic growth in earnings.
Ralcorp's fourth-quarter results, issued on the same day the deal was announced, underlines the recent issues the company has faced. Volumes fell, which combined with inefficient production and rising costs, hit profits.
However, Jagdale's question prompted Rodkin to reply: "Let's make no mistake about this. This is a compelling deal both strategically and financially."
But some still had more strategic concerns. "We struggle with the long term strategic viability of running both private label and branded offerings under the same roof," Sanford Bernstein analyst Alexia Howard said, echoing the view of many industry watchers when food companies try to supply both brands and own label.
Howard saw some positives from the deal, including the recent growth in the US private-label sector, the potential for ConAgra to build a "premium" private-label portfolio. However, she added: "Branded offerings require a focus on innovation, marketing, helping with category management, service levels and so on, while historically, private-label programmes have focused on low cost and simple product ranges. As a result, we believe that trying to manage both kinds of business in a big way under the same roof bears some risk."
Furthermore, while there is no denying that, in recent years, private label has gained sales from brands in the US, some are questioning the sector's potential. SymphonyIRI recently claimed the own-label category in the US had reached a "glass ceiling".
Speaking to just-food, Doug Knudsen, president of sales at ConAgra, insisted private label in the US has "a lot of room for growth" and argued the fastest-growing retailers in the US were more "private-label oriented".
Knudsen also brushed off concerns ConAgra would struggle to grow both brands an private label. "Let me just say this: we already have existing private-label and branded businesses and we've been successful. In most cases, we don't have a lot of category overlap. As you look at this acquisition, it's very similar in that respect. We feel very confident about that."
The acquisition could allow ConAgra to develop premium own-label ranges instead of simply competing on price. Rodkin said ConAgra's strength in areas like innovation could be one benefit it brings to the table and it would allow the company to manage the two sides of the business closely.
At Sanford Bernstein, Howard agrees - up to a point. "I agree that if they can push into the realm of premium private label and true innovation, it would strengthen their relationships with retailers and build loyalty with consumers," she says. "My only question is whether this can be done effectively in Ralcorp's core categories – in cereals and snack bars, the branded players are investing so much in marketing and innovation that a range of private label products tailored to one chain couldn't really credibly play a leading role in category innovation – and in dry pasta the product is so commoditised that real innovation seems a stretch."
Furthermore, Post Holdings, the branded cereal group Ralcorp spun off last year as an alternative to accepting ConAgra's earlier offers, last week announced plans to move into private-label cereal.
However, Rodkin and the rest of ConAgra's management, including Knudsen, remain confident about the benefits of the deal and the company's ability to grow its existing business and its new acquisition.
Knudsen's insistence that one should look at ConAgra's record in managing brands and own label highlights the recent deals the company has made in the fragmented US private-label sector. It is an area ConAgra has only recently made serious efforts in and, even as the ink was drying on the Ralcorp deal, Wall Street was looking at where it could look next.
The ConAgra sales chief, however, was coy about whether the company would further underline that confidence and continue its acquisition spree in private label. After the Ralcorp announcement, analysts touted ConAgra has a potential buyer of private-label firm TreeHouse Foods (which itself added to its business with an acquisition on Friday).
It would be a surprise if ConAgra makes such a sizeable deal so soon after the Ralcorp transaction. However, the US own-label sector is fragmented and the direction of travel for ConAgra seems to be moving more towards private label. Brands remain the largest part of the business but its branded roster contains some products that are not category leaders; could it offload some of those to fund its next big push in private label?
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