While volume was up across Smuckers consumer foods business, profitability was down

While volume was up across Smucker's consumer foods business, profitability was down

JM Smucker has defended its pricing strategy after a fall in second-quarter sales.

The US food group managed to grow profits in the three-month period due to lower costs. However, sales fell 4% after a moves in the last year to cut prices on products, notably coffee and peanut butter, failed to boost its top line.

Smucker also lowered its outlook for annual sales, which led the firm's shares to fall yesterday (20 November). A key factor in the reduced forecast was due to lower expectations on Smucker's K-Cup coffee lines.

However, Smucker saw price cuts on its food brands also hit sales. In contrast to the group results, Smucker's US consumer foods business saw sales volumes rise but revenue and operating profit fall.

Speaking on the firm's earnings call, CEO Richard Smucker said the cuts the company made to prices, combined with moves to scale back its portfolios in its international, foodservice and natural foods operations, had led to "expected deflation on the top line".

COO Vincent Byrd told analysts "much" the fall in profits from food was "anticipated" reflected a previous decision to "lean into" price declines as it looked ahead to lower commodity costs within its peanut butter business.

"If you go back a couple years ago when our commodity costs were rising, at that time, we were reaching price points that were probably beyond some consumers' reach, as well as our gaps were growing significantly. About a little over one-and-a-half years ago, we really tried to work on closing those gaps, leaning into pricing and make sure we're doing a better job of managing those and hence," Byrd said.

"It is all about managing and passing on those costs so that we can reach those consumers where maybe they had not been able to afford some of our product offerings in the past."

Smucker's peanut butter brand Jif saw volumes increase 2% but net sales fall 5% after it lowered prices.

Paul Wagstaff, the president of Smucker's consumer foods business in the US, said the group "took pricing down" on peanut butter in January of last year. The move, he insisted, was "the right thing to do".

"We feel comfortable where pricing is right now, and the results and the volume that we've seen, the growth we've seen on the Jif business is solid," Wagstaff said.

"We leaned into that ahead of some of the commodity cost decline. We did the same thing for fruit spreads, leaning into that. And then also, on oils, we've been more aggressive on the pricing and getting ahead of that commodity cost decline that we've seen overall. So we feel we're very well positioned where our pricing is today, and the commodity costs are getting back to the more normalised position relative where our cost is. Going forward, we don't anticipate taking any more pricing action in the near term."

Janney Montgomery Scott analyst Jonathan Feeney questioned whether the peanut butter category would "just grow at a population level", adding: "Or are we still in this kind of volume recovery mode where a lot of the stock-up activity you'd expect in this category that came to a complete halt and reversed itself, say 18 months ago, is now happening a little bit more at the margin? Are we now back to like below single-digit category outlook from that perspective?"

Wagstaff conceded that, from a long-term growth perspective, peanut butter has been "pretty much in single-digit growth for a while now".

"Bottom line, we're having a lot of new products enter the category, and I think those are doing well. So we should see some continued growth on the peanut butter category, and we feel comfortable with the growth level that we've seen so far."

Byrd added: "We were actually very pleased with the overall category. Now that we have some of the price declines, we feel very good that the category is going to continue to grow in the future."

Separately, Goldman Sachs analyst Jason English questioned Smucker's "appetite" for M&A and asked whether might it become "more active". During the quarter, Smucker snapped up US organic and gluten-free business Enray.

"We continue to have an appetite," CEO Richard Smucker told analysts. "We have a number of brands out there that we'd be very interested in. We've made a number of contacts, which we have all the time, kind of keep our lines in the water. But none of those have hit, except for Enray in the last quarter.

"But as we go forward, you're going to see, especially at interest rates this low, more acquisition activity and probably higher prices. So we want to make sure that we are doing the right acquisitions at the right price. There have been a few that we've walked away from because the prices have been too high. And we think a great brand at a bad price is still a bad acquisition. So we're going to continue to be in the market out there. And I think in the next, hopefully, 18 months or so, we'll have something else in our portfolio."