PowerBar sales in the US are struggling

PowerBar sales in the US are struggling

Post Holdings, the US food group best known for breakfast cereals, has broadened its business in the last 18 months. This week, Post continued its expansion in what it calls "active nutrition" with the acquisition of Nestle's sports nutrition business. However, Post has a challenge on its hands revitalising flagship brand PowerBar. Dean Best reports.

At the start of the week, there was news of a piece of M&A that underlined the expansionist plans of one food manufacturer and the desire of another to trim its portfolio.

US food group Post Holdings, best known as being the home for cereal brands like Grape-Nuts and Honey Bunches of Oats, has struck a deal to buy two sports nutrition brands from Nestle.

PowerBar and Musashi are set to join Post's burgeoning portfolio of what it calls its "active nutrition" businesses and which includes two US companies it has acquired in the last year - Premier Nutrition Corp. and Dymatize.

With mainstream breakfast cereal sales in the US stagnant, Post has worked to diversify its business and has made a series of acquisitions, including in gluten-free cereals, granola and pasta.

However, it is its work in "active nutrition" that has caught the eye. The category is growing and Post sees an opportunity to build a business in a buoyant sector to offset challenges in mainstream cereal.

That said, industry watchers have suggested PowerBar has come under increasing competition and is rated less strongly than rivals including Clif Bar. Research carried out by US-based brand analysts InsightsNow on the country's energy bar market suggested consumers "liked" Clif Bar more than PowerBar, although where the gap between the two brands on how they "energised" consumers was narrower.

And, while Nestle does not provide sales data for specific brands, PowerBar's revenues in the US, a key market, are in decline, according to Barclays Capital analyst Andrew Lazar, citing data from Nielsen.

"The difference between Post's other active nutrition acquisitions and PowerBar, however, is that Premier and Dymatize are growing in the low-double digit range, whereas PowerBar sales actually declined 14% in the most recent 52 weeks per the data captured by Nielsen and has lost share - and was declining low-to-mid-single digits in the two years prior," Lazar said. "In our view, part of this decline is due to the plethora of options in the snack bar arena, as well as perhaps less attention paid by Nestle in recent years."

Lazar does see some opportunity for growth as Post groups together its active nutrition business. He also believes the acquisition will benefit Post's cash flow and argues the new asset will need much in capital investment in the medium term.

"With the CEOs of Premier Nutrition and Dymatize set to be co-CEOs of Post's Active Nutrition group, we'd like to think there's opportunity to capitalise on PowerBar's brand equity across Post's broader active nutrition platform," he said. 

"Like Post's other recent deals, we expect this transaction will be nicely accretive to free cash flow. The company noted that Nestle has been investing capital in the PowerBar business over the past seven years and that manufacturing capacity exists in the United States, Germany, and Australia to meet projected demand for the next three to five years. Accordingly, we'd expect the capital investment needs for this business to be low in the near to medium term."

From Nestle's perspective, that it has sold its sports nutrition brands is unsurprising. Speculation over the future of PowerBar first emerged in September, although Nestle refused to comment. However, a month later, CEO Paul Bulcke indicated Nestle had identified a hit-list of under-performing peripheral businesses, a "shortlist of fixing", but did not reveal details of which assets were under scrutiny. In November, Nestle announced it would sell the bulk of its Jenny Craig weight management business and, in the early weeks of 2014, a deal for PowerBar has been announced. In between times, in December, Nestle sold its stake in Swiss food ingredients group Givaudan, a move said to have brought in around CHF1.2bn (US$1.33bn).

Kepler Cheuvreux analyst Jon Cox said the transactions including the sale of PowerBar - and potentially the disposal of French frozen food unit Davigel, which was speculated about this week - could see Nestle raise over CHF2bn. It may, he argued, lead to a programme to buy back shares after a period of "sluggish" growth at the world's largest food manufacturer - and the prospect of more ahead.

"The [PowerBar] disposal is part of the company's programme to divest of businesses where it feels it can no longer add value and to make its assets sweat following a ramp up in capital expenditure in the last few years and a period of strong growth," Cox said this week.

"Overall, 2013 organic sales are likely to miss the company's 5% organic sales growth target and we see a period of more subdued earnings growth ahead, which could lead to further drift and sideways trading in the stock."