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September 24, 2015

ConAgra Foods suggests there is life in old brands yet

Much has been made of the decline of legacy brands in the US, which have failed to keep up with shifting consumer demands. In its first-quarter update, released yesterday (24 September), ConAgra Foods claimed a change in strategy has enabled it to breath fresh life into some of its iconic – but declining – brands. Katy Askew reports.

Much has been made of the decline of legacy brands in the US, which have failed to keep up with shifting consumer demands. In its first-quarter update, released yesterday (24 September), ConAgra Foods claimed a change in strategy has enabled it to breath fresh life into some of its iconic – but declining – brands. Katy Askew reports.

“Many of America’s largest food and beverage companies are in trouble. Their iconic brands are increasingly out of favour with consumers whose preferences and priorities have evolved. Unless bold action is taken, they run the risk of following baby boomers – once their core consumer – into retirement,” warned Rabobank analyst Nicholas Fereday earlier this year.

“Bold action” is exactly what ConAgra Foods CEO Sean Connolly insisted he has delivered since talking the helm at the US food group in April. Indeed, it is fair to say that Connolly has shaken up ConAgra’s strategy.

Within a few short months, he revealed plans to sell off ConAgra’s private-label business (with a final announcement expected in the coming months) and stepped up efforts on the now-familiar efficiency drive that food makers across the board appear to have embarked upon. But it is his strategy to return some of ConAgra’s iconic – if sometimes outdated – brands to growth that really catches the eye.

In the quarter to 30 August, ConAgra reported net sales of consumer foods of approximately US$1.7bn, flat compared to the corresponding period a year earlier. Organic growth stood at 2% year-on-year, reflecting flat volumes but a 2% improvement in price mix.

This improvement in price/mix is significant, not least because it was a big contributor to the 250 basis point improvement in margin during the quarter. Alongside improved productivity, price/mix was a big contributor to the 21.9% jump in operating profit from continued operations – stripping out private label.

“Our plan is concentrated on strengthening our brands and providing resources behind the brands and channels that generate the best return. By focusing on the strongest brands and channels, we are getting better price realisation and trade efficiencies. The outcome is a better price mix and margin improvement. The strong operating profit we delivered in the first quarter is direct evidence of our progress and reflects the improved price mix and benefit of the more targeted approach to advertising and promotion investment,” Connolly explained during a conference call with analysts.

ConAgra is a broad church of brands, some of which, with an appropriate face-lift, feed into powerful consumer trends. And it is these brands ConAgra has put its cash behind. By investing in marketing, product development and brand renovation, Connolly is picking away at some of the deep cuts of prior years. At the same time, by commanding higher price points, this investment does not need to come at the cost of margin.

“We continue to invest and achieve strong operating results on Marie Callender’s, Hunt’s, Rotel, Reddi-Wip, Slim Jim and PAM, all our category leading brands that are well positioned with consumers and deliver strong margins. We’ll continue to invest in brand building, A&P, renovation and innovation and expand into growing customer channels,” the chief executive revealed. “PF Chang’s was re-staged with improved packaging graphics and a stronger product range last year. And since the re-stage the brand has posted strong double digit growth.”

Sanford Bernstein analyst Alexia Howard praised the segmented approach to ConAgra’s brands. “We applaud… [the] approach of a clear segmentation of the brands between those that will be nurtured for growth versus those managed for cash, as an all-out attempt to revive all brands would likely not be productive,” she wrote in an investor note.

But what of ConAgra’s less on-trend brands? The likes of canned pasta business Chef Boyardee or frozen diet brand Healthy Choice? ConAgra has not thrown in the towel here either. By “executing well” on “product, packaging, pricing and promotions”, ConAgra was actually able to grow Chef Boyardee revenue in the quarter, Connolly revealed.

“We continue to make progress in transforming the Healthy Choice franchise as well,” he insisted. “Healthy Choice Café Steamers continues to perform well in a challenging segment. And Simply Steamers, our newest Café Steamers product contain nothing artificial while offering 100% natural protein. These new items are performing well and importantly they command a higher retail price.” Connolly, however, gave no indication of whether Healthy Choice sales remain in decline.

According to Stifel Nicolaus analyst Chris Growe, ConAgra appears to be investing behind around 60% of its branded portfolio. “Within that more advantaged portion, the company sees promise in the value proposition in some of the brands that are likely to resonate with consumers. For instance, the lack of chemicals used to process Hunt’s tomatoes and the real cream used in Reddi-Wip are points of differentiation that could resonate with consumers, and this differentiation will likely be the focus of targeted messaging,” he notes.

Of the remaining 40% of the portfolio, ConAgra has indicated it is open to pruning down and divesting brands that it sees less potential in. However, Growe is sceptical. “These are brands with less opportunity and therefore are unlikely to command compelling valuations to drive significant value from here… the significant amount of multiple expansion necessary to offset the lost profits (and cash flow) as well as potential tax leakage (though that may be addressed in a sale of private brands) may preclude any significant divestiture activity.”

It is probable, then, these brands will be managed for cash, at least in the near term.

Is this strategy “bold” enough to stem ConAgra’s decline? Speaking of the challenge facing all of the US’s largest branded food makers, Rabobank’s Fereday suggested repositioning core brands may help improve the situation, but “new brands and products are needed that better respond to the demands of these new consumers”.

Connolly would appear to agree. In May, the group swooped for natural and organic frozen meal maker Blake’s All Natural Foods. However, with so many brands requiring so much attention, it seems likely M&A will take a back seat, for the time being at least.

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