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September 6, 2011

Comment: Risks remain over Campbell’s new direction

Most new chief executives want to make their mark when they take charge of a company and Denise Morrison, Campbell Soup Co.'s new president and CEO, is no exception.

By Dean Best

Most new chief executives want to make their mark when they take charge of a company and Denise Morrison, Campbell Soup Co.’s new president and CEO, is no exception.

In fact, Morrison was already making an impact before she took the helm at the US food company.

Her move from the head of Campbell’s North American soup, sauces and beverages division to succeed Doug Conant as president and CEO was announced a year ago and she was immediately given the role of COO – and a seat on Campbell’s board – in advance of her formal promotion to the top job.

Morrison set about making a series of changes to Campbell’s senior management team and made some more appointments in January this year. In June, it was Morrison, as COO and CEO-elect, who announced a number of measures to reduce the company’s costs, including the closure of a plant in the US and the departure from Russia, a market it entered with such fanfare just four years ago.

A month later, Morrison outlined Campbell’s “new strategic direction”. The company plans to focus on three categories – simple meals, baked snacks and healthy beverages. It said the development of new products and packaging as the “primary driver of organic growth” and revealed it would spend US$100m in its new financial year, which started on 1 August, on marketing and innovation.

Perhaps the speed with which Morrison set about forming her own management team, restructuring the business and setting out new priorities for Campbell was due to the challenging couple of years the company has endured, particularly in the US soup sector, where its sales have fallen for two consecutive years.

Industry watchers welcomed the thinking behind Campbell’s new direction. Sanford Bernstein analyst Alexia Howard said “part of the issue” for the company had been that it “favoured returns over growth”. The new strategy meant that Campbell was “making the shift to focus more on growth”, she said.

However, uncertainty still surrounds the outlook for the US soup sector. Has canned soup suffered due to the downturn or is it permanently in decline? Can Campbell find the right mix of new products, price points and promotions to revive sales in the face of fierce competition from the likes of General Mills? Is the company able to meet the needs of new groups of consumers, like the growing number of Hispanic shoppers?

On 1 August, Morrison formally became Campbell’s president and CEO and on Friday (2 September) held her first results conference call – and those questions remain to some extent unanswered.

Campbell has upped prices on the soup products on sale in the US, is looking to invest less money in trade promotions and instead focus more on building its brands and its new products. However, the US soup category remains fiercely competitive, with General Mills cutting prices and increasing its promotional activity.

Morrison was asked whether the promotional moves from Campbell’s rivals could affect retail space for the company’s brands and new products. She was confident about Campbell’s strategy.

“We have not seen our branded competition move up base price in the marketplace and we believe that, with the latest round of pricing, we have the opportunity to offer the best price/value across the category, while still covering our inflation and our marketing investment. Our intention is to be competitive,” she said.

However, in recent years, there have been times when Campbell’s sales strategy for soup in the US has appeared unsure. On occasion, its promotions have failed to increase sales and moves to reduce sodium in some lines received a lukewarm reaction from consumers – so much so that Morrison’s “new strategic direction” unveiled in July included an announcement that Campbell would put soup back into some lines.

There were indications that Campbell executives recognised the potential dilemma it could face in attempting to profitably grow its simple meals business in what will remain a competitive category.

CFO Craig Owens insisted Campbell would place “more emphasis” on brand building and less on “trade discounts”. 

However, his comments were followed by Campbell’s senior vice president of finance, Anthony DiSilvestro, who pointed to the investment the company would make on promotions. “It’s important to recognise that, even though we’re pulling back a little bit on trade, we are still spending a significant amount of funds on promotional spending and advertising,” he said.

Morrison agreed but insisted Campbell would “apply a whole new level of discipline to that spending”.

Morningstar analyst Erin Lash believes Campbell could see volumes fall if it “ratches back” promotional spending to preserve margins. “We believe volume could suffer even more as consumers have been conditioned to expect lower prices, which could prove to be a difficult habit to break as developed market consumers are under particular strain,” Lash tells just-food.

The Campbell chief is also looking for the company’s innovation in soup to be more “consistent”, which, of course, is more easier said than done. New products have already been introduced, including Slow Kettle soups. Sanford Bernstein’s Howard says Slow Kettle could be a factor in the company’s US soup performance in the year ahead.

“Management maintained FY12 EPS and EBIT targets on an absolute basis. We see limited downside if canned soup sales can be stabilised and the new “Slow Kettle” soups prove to be incremental rather than cannibalistic,” she reflected. “However, if the US consumer has simply abandoned canned products in search of fresher alternatives, then stemming volume losses in ready-to-serve and condensed soup may be a structural issue that takes some time to play out.”

Of course, it will take some time before we can tell Campbell’s investment in innovation has paid off. Not every new product can succeed, particularly in such a competitive category. Lash, however, argues that, in theory, a focus on innovation could pay dividends. “It is definitely going to take some time for these investments to yield measurable improvements. From our perspective though, an innovation-driven strategy is more sustainable and profitable over the longer term.”

There are parts of Campbell’s business that have performed well in recent months. Sales from the company’s global baking and snacking operations climbed 9% in its last financial year, admittedly boosted by the translation of sales made outside the US into dollars but volumes increased 3%. Operating earnings from the division were up 10%, again, thanks to exchange rates but also to better volumes from Campbell’s snacks units Pepperidge Farm and Arnott’s.

Morrison said Campbell’s baking and snacking operations were an area “targeted for accelerated growth” and the company plans to step up the development of new products with its new Pepperidge Farm Innovation centre”, which is set to be ready next autumn.

However, the fact remains that US simple meals, which houses its domestic soup operations is Campbell’s largest in terms of sales and operating earnings. And, as Morrison embarks on implementing her new strategy in her first year in charge, much focus will be on whether she can get the company’s soup sales bubbling.

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