Katy Askew

Best bits: Hormel broadens portfolio with Skippy buy

By Katy Askew | 7 January 2013

Last week may have been the first week back at our desks after the new year, but we hit the ground running with news that Unilever sold its Skippy peanut butter business to Hormel Foods.

At first glance, a mainstream brand like Skippy operating in a category with extremely high household penetration in the US is not an obvious fit for Hormel, which tends to be more of a niche player in high-growth categories. However, speaking during a conference call following the announcement, Hormel Foods was in an upbeat mood.

Skippy plugs a gap in Hormel's portfolio. The business broadens its exposure to the commodity markets - acting as a counter balance to feed costs. It also increases the contribution of the grocery side of Hormel's business.

However, as just-food reported last week, it is Skippy's growth prospects that really seem to excite Hormel management. The deal increases Hormel's international sales by 30% and the company thinks it will be able to grow the brand - and category - internationally while leveraging Skippy's presence in China as it looks to further roll out its Spam brand in the market.

Domestically, Hormel will "unleash" its innovation capabilities on Skippy as it looks to take the brand "out of the jar". While the company is confident of its ability to compete with US players - such as JM Smucker's Jif brand - in the peanut butter category, the group feels that the best growth prospects in the US will come from moving the brand into complementary categories.

So, with all this potential, one is rather left wondering why Unilever decided to sell Skippy in the first place.

As one analyst told just-food, peanut butter "simply isn't core enough". Unilever is looking to emerging markets to drive growth and, for all Hormel's optimism about the future, around 85% of Skippy's sales are currently generated in the US. The sale further skews Unilever's business towards emerging markets.

Also, with margins in the region of 10-15%, the business is not as profitable as the majority of Unilever's other food interests.

Nevertheless, the sale does present Unilever with a dilemma in the US. The company has said it remains committed to its food business in the US, yet it has divested businesses worth around 8% of US retail sales over the past year (including the sale of its frozen meals brands to ConAgra).

The company's main food interest in the country, then, is in ice cream. While Unilever has invested in innovation in this sector, including the recent roll out of Magnum, it is competing in a mature category dominated by Nestle's Dryers and Cart D'Or brands. There will be no easy wins here. So, if Unilever is to maintain the relevance of its US food interests, where will it look to drive growth?

Another company desperately looking for a means to drive growth is likely to be UK supermarket operator Morrisons. As if to confirm last week's analysis of the issues facing UK retailers, in its trading statement released this morning (7 January) Morrisons highlighted a number of structural challenges it is coming up against.

Significantly, the company said its sales have been hit by shifting consumer behaviours and growing demand for convenience and online shopping. Morrisons has been late to commit to these emerging channels and, while the group plans to have 70 c-stores open by the end of the year, it is yet to enter the world of online retail.

Perhaps Morrisons has been slow to take up these formats because they represent a considerable challenge to short-term profitability. Tesco and Sainsbury's, both of whom have online businesses, are reticent when it comes to revealing the profitability levels of this channel. And, for these retailers, the rapid growth of online brings other challenges. As - presumably less profitable - online sales grow, sales from the core store portfolio are being cannibalised, placing store profitability under pressure.

Sectors: Commodities & ingredients, Condiments, dressings & sauces, Mergers & acquisitions, Multichannel

Companies: Unilever, Hormel Foods, Morrisons, JM Smucker, Magnum, Nestle, Tesco, Sainsbury’s

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