Comment: Challenges ahead as ConAgra goes on to the front foot
ConAgra believes it can revitalise struggling consumer brands
After two profit warnings in five months, ConAgra Foods boss Gary Rodkin was correct to use the CAGNY conference this week to front up about the problems at the US food group - and to try to demonstrate the company can rectify them.
Rodkin told analysts in Florida ConAgra was "confident" it could "overcome" the challenges facing the company - soft sales from some of its key consumer brands, integrating US private-label supplier Ralcorp Holdings and issues within its B2B commercial foods business.
Some of these challenges are likely to only be short term. ConAgra's commercial foods arm has recently been hit by the loss of a major foodservice customer and quality issues with a potato crop. Given the progress ConAgra has made in building its international foodservice customer base, and the growth in quick service restaurants in Asia, the company is likely to be able to overcome the loss of the contract. The problem with the potato crop is quite clearly a short-term issue.
However, ConAgra may face more work with its consumer foods and integration of Ralcorp. Let's take consumer foods. Rodkin admitted ConAgra had tried to broaden the consumer base for three brands - Chef Boyardee, Healthy Choice and Orville Redenbacher's - without success. "We have spent too many resources on these brands trying to penetrate new consumer segments by overcoming their perception barriers, and frankly, it hasn't worked," he told analysts.
ConAgra would instead now focus on the brands' "core users", Rodkin said. "There are many millions of these engaged consumers. And we are confident that we can stabilise our share and with a maniacal focus on these consumers, we can potentially drive brand preferencing growth."
It is something of an about-turn for ConAgra and one can understand the company wanting to turn back and serve consumers that buy the brands regularly. However, as Rodkin acknowledged, it will "take a bit of time" to "optimise" its promotions and merchandising on the brands.
However, revitalising these brands will not be easy. Take Healthy Choice, operating in a frozen meals category in decline. Competition remains fierce and could focus even more on price, particularly with a complete consumer recovery in the US not on the immediate horizon.
Rodkin remained bullish on the prospects for private label in the US. There have been claims the rise in own label in the traditionally brand-centric market could only go so far.
The ConAgra chief acknowledged the recent growth in private label in the US has "flattened over the last year". Rodkin pointed to manufacturers "bringing the price gap down" and added: "The dynamics between the customer and the manufacturer are unsustainable."
He insisted the longer-term outlook for the sector was bright. Retailers that had "prioritised" private label had "enjoyed growth that is dramatically better" than their rivals. "Private brand is going to continue to be a big growth vector in this industry. I am absolutely confident of that," Rodkin said.
ConAgra's private-label business was focusing on more than just price. "Quality has become increasingly important in private brands as these brands are a true reflection of the retailer," Rodkin said.
However, a key short-term focus for ConAgra will be bedding down Ralcorp. Rodkin admitted the integration had been "tougher" than ConAgra had expected. "The sales force was cut too deeply, pricing was done too bluntly and there were supply chain related customer service issues," he said. "We didn't have visibility to the full extent of the issues, so we were slow out of the gate in stabilising business. In addition, given the competitive pressures, we deliberately chose to make some pricing concessions to stabilise volume trends and that frankly has weighed on our earnings this year."
Nevertheless, Rodkin insisted synergies from the deal would benefit ConAgra in areas like production and procurement. He also emphasised the "scale" the deal has given ConAgra in private label, which remains a fragmented sector in the US. The acquisition of Ralcorp made ConAgra the largest own-label supplier in the US, a market where the sector remains fragmented.
ConAgra is still keen to build its business in private label through acquisition after bedding down Ralcorp. However, ConAgra is not the only private-label player in the US looking to expand through acquisition - TreeHouse Foods said last week it had a "robust appetite" for deals - and Rodkin faced questions about whether the issues with Ralcorp meant the company had missed opportunities for more M&A.
"I would say our strategy all along has been to delever over the next several years, that's job one. Because we got a big job on our hand, just integrating the complexities of Ralcorp going through the transformation, so I don't think anything has really changed much on that," Rodkin said. "I do believe that as we get past that, our long-term plan is to continue to look to make smart consolidation moves in an industry that is extremely fragmented. There are many, many smaller companies out there and we believe once we get past this period we'll be back in that game."
It has been a challenging year for ConAgra but the company told CAGNY it had confidence it can work through the issues facing the business. It will not, however, be easy.
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