ConAgra Foods has become the latest US food manufacturer to adopt a somewhat pessimistic tone when looking ahead to 2011.

The company behind brands like Chef Boyardee canned pasta, Healthy Choice ready meals and Banquet pies yesterday (9 December) cut its second-quarter earnings target, which also led the business to lower its forecast for its full financial year.

ConAgra issues its results for the second quarter to the end of November four days before Christmas on 21 December but yesterday warned investors that the quarter had been tough.

The group said it had endured “difficult category conditions”, indicated that its promotions had not had the desired effect and said commodity costs had risen faster than expected.

Those three factors, combined with lower than expected profits from its B2B Lamb Weston potato business, meant ConAgra had to cut its full-year earnings target – the second time it had done so in three months.

CEO Gary Rodkin had already given some indication that ConAgra was expecting a challenging second quarter. Speaking to analysts when the company issued its first-quarter results in September, Rodkin said the second quarter would be “a bit below” the corresponding three months a year earlier. However, he insisted the impact of recent acquisitions and NPD would improve sales and profits as ConAgra moved into the second half of its fiscal year.

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Nevertheless, it was telling that Rodkin also admitted that the trading environment in that first quarter had been “more challenging” than ConAgra had expected, with consumers “cherry picking” and stocking up less amid “aggressive discounting” from retailers. Rodkin tried to calm investors by suggesting the situation would abate.

However, ConAgra’s second profit warning suggests trading remains tough. Like Campbell, ConAgra’s promotions do not seem to have paid off as management would have hoped. Consumer confidence remains fragile and the level of promotions, particularly in categories in the centre of the store, remain high.

CEOs have spoken of their belief that rising commodity prices will lead to more ‘rationality’ in some food categories, as retailers, tired of seeing like-for-like sales fall, promote less. However, consumer spending remains weak and last week David Dillon, chief executive of US retail giant Kroger, said deflation was hanging around due to promotional spending by national brand suppliers. Nevertheless, Dillon still said he sees prices rising. “Inflation in grocery has been slow to develop, but we still believe it’s coming,” Dillon said.

That said, some industry watchers believe promotional intensity in the US will remain high as we head into 2011. Bryan Roberts, director of retail insights at Kantar Worldpanel, pointed, for instance, at ambient categories, where food inflation has a “substantial time lag”.

With suppliers and retailers unsure whether US consumers are ready to buy less on promotion, the country’s grocery sector promises to remain a competitive battleground. Only the strongest brands are likely to thrive. And therein lies the rub for ConAgra, according to Morningstar analyst Erin Swanson.

“We believe increased promotional spending by the packaged food firm is failing to drive higher volume because ConAgra lacks the brand strength and category positioning enjoyed by many of its peers,” Swanson said yesterday. 

“Given commodity prices that are on the rise and an intensely competitive retail environment, we think it is unlikely that manufacturers will be able to pass through meaningful price increases to customers in the short term. Relative to its competitors that operate with stronger brand portfolios, ConAgra is in a more precarious spot and likely to incur further margin pressure, in our opinion, as its weaker category positioning will make charging higher prices a greater challenge.”

ConAgra will shed more light on its apparent predicament – and on its cautious outlook for 2011 – in two weeks.