Focus: Hormel's acquisition of Skippy
Hormel plans to take Skippy "out of the jar"
The sale of Unilever's Skippy business was confirmed yesterday (3 January) when it was announced that the iconic peanut butter brand would find a new home with Hormel Foods. While Hormel clearly has big plans for Skippy, Unilever will be hoping that an increased focus will benefit its food portfolio. In part one of our two-part analysis, Katy Askew looks at how Hormel hopes the deal will benefit its bottom line.
Unveiling its US$700m acquisition of Skippy from Unilever, Hormel Foods was in an upbeat mood. According to management, the deal - which was primarily funded through cash-on-hand and carries a number of tax benefits - will be "modestly accretive" to EPS this financial year and add $0.13-$0.17 in fiscal 2014.
At first glance, a mainstream brand like Skippy operating in a category with high household penetration is not an obvious fit for Hormel, which tends to be more of a niche player in high-growth sectors. However, speaking to analysts during a conference call, CEO Jeff Ettinger insisted that Skippy was a good fit for Hormel.
"I do feel very confident, given the breadth of the portfolio ... there is no reason why Skippy can't fit in with the rest of our business," Ettinger commented yesterday morning.
Indeed, the acquisition of Skippy carries a number of benefits in terms of Hormel's product mix. Hormel has long talked of the need to find a balance between its packaged foods and protein businesses and the Skippy acquisition significantly increases Hormel's exposure to the packaged foods area. Upon completion, the contribution of Hormel's grocery segment will rise from 24% to 33% of projected 2014 profits.
While Skippy is heavily exposed to the swings of peanut butter prices, which recently spiked but are now on a downward trajectory following improved harvests, CFO Jody Feragen told analysts that Hormel views this in a positive light.
"We see that as a plus from our balanced model standpoint. As we get into crops beyond the feed costs we think that could be a good balancing point," she revealed.
Margins at the group's Jennie-O turkey and Dinty Moore stew units have been hit by drought in the US, which has caused animal protein prices to jump following a spike in corn and soyabean feed costs. However, as this side of the commodities see-saw rises, peanut butter costs have gone down and by broadening its exposure to commodity costs Hormel hopes it will be able to offset some of the more extreme swings in its cost base.
As Janney analyst Jonathan Feeney observes: "Management has made a very smart move in diversifying away from its animal protein core at a time when margins are likely to correct downward. This deal plugs that gap. We expect peanut butter volumes to rebound from their weak 2012 levels (-3.2%) as pricing follows peanut costs lower."
Skippy's appeal goes beyond the immediate impact it will have on Hormel's portfolio and the group has bigger plans for the brand that could well see its contribution to group revenues and earnings gather pace.
Skippy is the second largest player in the US peanut butter category, behind JM Smuckers' Jif brand. Ettinger suggested that the company hopes to grow its share of the US nuts and spreads category from the 17% of total sales that it currently accounts for.
"We feel that we can do a very solid job with the core category," Ettinger said. "There are always share opportunities and we will always compete aggressively."
However, given the competitive nature of the category, any share gains are likely to be both modest and hard-won, coming at the expense of margins - which Hormel revealed currently stand at a relatively modest 10-15%. And, with already 74% household penetration in the US, the business is unlikely to benefit greatly from incremental growth.
According to Euromonitor, the nut and seed spreads category is expected to report a compound annual growth rate of 2.6%, or in value terms $200-230m, over the next five years. Much of this growth is coming from speciality nut butters. The speciality nut category is currently valued at just $260m, but the segment witnessed value growth of around 40% last year.
In order to grow the brand domestically then, Ettinger revealed that Hormel plans to "turn our innovation skills lose on this brand" in order to "find ways to take Skippy out of the jar".
"Through innovation [we will] take a brand that has very high penetration and brand appeal and move it into complementary categories," he added.
While the majority of Skippy's $370m annual sales are currently generated in the US, Hormel believes the brand has greatest potential for expansion overseas.
Outside the US, Skippy is the number one peanut butter brand, generating revenues of around $100m. Off the bat, Hormel said the acquisition will increase its international revenues by approximately 30% and expand its global footprint. The business has a presence in more than 30 countries, including China where it operates one manufacturing facility.
In markets like China, where Hormel is currently in the process of rolling out Spam, Ettinger said the deal would enable Hormel to approach retailers with a more compelling offer. "Any time you can bring more offerings into a customer and be more relevant that is helpful... We think it will be a leveraging point to be able to accelerate our growth of Spam," he commented.
Hormel is also banking on its ability to accelerate Skippy's international growth, which is currently in the high single digits.
"We are excited by the international opportunities and China is front-centre of this... we think there are great ways to catch the wave of growth in that market," Ettinger commented. "This brand got out there first and is very well placed to take advantage of that."
While overseas demand for peanut butter is dwarfed by US consumption, Ettinger insisted there is a growing international market for the product. Hormel said it plans to deliver Skippy to an international audience and promote it as a product that can be used as more than a sandwich filler. For example, Ettinger cited the use of peanut butter in cooking as a widespread practise in Asia that Hormel could potentially exploit.
So, while Hormel is facing an uphill struggle to grow Skippy at home, overseas the company is confident it will be able to generate fast-pace growth.
For insight into Unilever's decision to sell Skippy and where the moves leaves the consumer goods powerhouse in the US click here.
Front-of-pack nutrition labels. It is a divisive subject that can turn those on both sides of the debate a nice shade of red....
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