Changing consumer habits are putting sales at some US packaged food companies under pressure

Changing consumer habits are putting sales at some US packaged food companies under pressure

It was a bumper week of 2014 financial results, particularly from the US, but a flurry of announcements - including some surprise admissions - from across the pond on Thursday perhaps best served to underline the challenges facing mainstream food manufacturers in the country.

A profit warning came in from Campbell Soup Co. in part due to the strengthening of the US dollar but, more pertinently, it cited its "gross margin performance" as a factor.

ConAgra Foods also cut its earnings forecast for its current financial year, which ends in May. The company blamed the ongoing dispute at ports on the US West Coast, which has had an impact on the exports of a number of US companies. Worryingly for investors, ConAgra also warned profits from its private-label business continued to be weak and admitted it was mulling another impairment charge on the division, just months after booking one.

And Kraft Foods Group, alongside its results for 2014 (a year in which the company failed to "deliver to our potential", according to its CEO), announced a shake-up of its senior management, including the departure of its CFO and chief marketing officer and the creation of a role of COO.

Different businesses with some specific problems, true, but a broad conclusion can be drawn - a number of traditional packaged food companies are finding the going tough in the US, a market undergoing, as the outgoing Kraft CFO herself admitted last year, unprecedented change.

More processed foods are falling out of favour, with simpler and healthier products increasing in popularity. The Internet and power of social media is enabling upstart companies to build fan-bases quicker and more effectively compete with the giants of the industry. And consumers are shopping less often in traditional outlets and more often at club stores, convenience outlets and online.

These are trends with which the packaged food giants operating in the US have been grappling for a while now but, judging by the announcements overnight, some are still finding the going tough.

Simply putting more money behind your brands may not be the best solution. The question of marketing investment came up on Kraft's conference call with analysts on Thursday. Stifel Nicolaus analyst Chris Growe suggested there could be a correlation between Kraft's sales growth falling below that of the catgeory and its reduction in advertising. "I realise you don't want to spend good money after bad but ... where is the organisation in terms of their development of those plans?" Growe asked. "I kind of thought at this point will be a point where you could be investing more heavily in marketing across more brands?"

RBC Capital Markets analyst David Palmer, meanwhile, suggested the combination of a fall in advertising spending and an increase in promotional investment on parts of Kraft's business "were not getting the returns you had hoped".

In both instances, Kraft's recently-appointed CEO John Cahill responded the company wanted to spend in an "intelligent" way. "Marketing remains paramount in its importance to Kraft and we would like to spend more money. We've got to develop the programs that are worthy of substantial dollars and that's where we're headed," Cahill said. "There's a lot we internally at Kraft can do to improve that around execution. We have the resources, we need to bring the right ideas and the right decision-making to bear to apply to these brands."

Cahill's comments were telling. Indeed, with sales volumes under pressure, some investors could question investment and it would take a strong-willed CEO to drive through a substantial push on spending. Furthermore - and this was also something flagged by Kraft last year - the entry of 3G Capital into the food sector with its takeover of Heinz has meant manufacturers are compared to a new leader on costs.

Leading that more "intelligent" spending at Kraft will be George Zoghbi, the company's vice chairman for operations, R&D, sales and strategy, who was appointed to COO - a new role at the business - as part of Cahill's management reshuffle.

Alongside ConAgra's profit warning, the company announced the appointment of its new CEO to replace the retiring Gary Rodkin. The embattled Chef Boyardee pasta maker said former Hillshire Brands chief executive Sean Connolly had a "track record of building brands, energising teams, and creating value".

Looking at ConAgra's recent performance, Connolly has plenty of work ahead, not least weighing up the company's next strategic move: should it sell off its struggling own-label business? Could ConAgra look to buy smaller branded peers? Connolly was a senior executive at the then Sara Lee when it split in two, creating meats-focused Hillshire.

Of course, M&A can be an option for US food majors searching for growth: General Mills' move last year for Annie's is a prime example. Spam maker Hormel Foods is said to be interested in US natural and organic meat supplier Applegate Farms, although neither company has commented publicly.

However, acquisition targets are likely to command hefty multiples. The price General Mills paid for Annie's equated to 27 times the US natural and organic food business' expected EBITDA, according to some analyst estimates.

Some of the biggest businesses in the US food industry are struggling as the sector goes through a period of significant change.

Tomorrow, a number of the sector's senior executives are heading to Florida for the annual Consumer Analyst Group of New York investment conference, or CAGNY.

Some US companies enjoying brighter times - the natural and organic-focused WhiteWave Foods and Hain Celestial - will outline their strategies for the next 12 months but the likes of Kellogg (fresh from its cut to its long-term sales targets last week), General Mills and Campbell will be scrutinised as they seek to tell the market how they will try to navigate a market undergoing the most upheaval for a generation.