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Hormel Foods is continuing to bolster its presence in the on-trend natural and better-for-you categories with its latest acquisition of nut-butter products maker Justin’s. But how far will the elevated focus on these areas go to alleviating pressure in Hormel’s refrigerated foods and pork units? Hannah Abdulla explores.

Spam owner Hormel Foods appears to be doubling down on its aim to win brownie points with millennial consumers after the firm announced a US$286m planned acquisition of natural and organic nut-butter maker Justin’s yesterday (18 May). 

Hormel made no secret of the organic and natural appeal of the Justin’s brand. Jeffrey Ettinger, Hormel’s chairman and CEO, said the buy fits the company’s aim of “complementing our existing brands with new offerings that resonate with younger, on-the-go and more health-conscious consumers”.

It comes as no surprise that Hormel is trying to garner sales via new avenues. Despite the firm upping its full year earnings target following what it called “a strong second quarter” and an expectation of growth for the rest of the year, net sales in the second quarter only actually inched up 0.9%. Growth from Hormel’s grocery products and refrigerated foods was tempered by declines from the company’s speciality foods, the combined international and Jennie O-Turkey Store divisions, the latter continuing to feel the fallout of the bird flu outbreak last year. 

Shares in the company dived 8.8% yesterday – its worst stock decline since 2008 – prompted by declining margins in its refrigerated foods business which accounts for about 48% of the group’s sales and concerns about its pork business which in the second quarter saw softness, particularly in Asia which has been recently flooded with EU pork, the firm said.

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“In recent weeks, margins have contracted considerably as hog supplies have tightened up, commented Heather Jones, analyst at BB&T Capital Markets. “In our view, the tighter supply is a function of disease issues…and could persist through mid-summer. We believe margins should recover in Hormel’s fourth quarter and be very strong in its first quarter of 2017. That said, we do not anticipate dramatic year-over-year appreciation in the first quarter, but do think they will be strong. We expect refrigerated foods margins to contract beginning in the second half of fiscal ’17 as significant new packing capacity comes on line and believe they could potentially trend toward the low end of the 7%-10% normalised range.”

Ettinger remained optimistic of the firm’s growth prospects in the near term. On a conference call in the wake of the group’s second quarter results, he said: “We really do expect pork operating margins to be higher for the full year because of the strong start we have had in the first half, but moderating in the back half.”

He added: “We are looking at a more favourable environment for net sales growth for multiple segments next quarter. This quarter was still not quite where we would like it to have been, but it was not at the level of declines that the last two or three quarters had been. So, we are seeing the sequential improvement”.

However the proposed Justin’s deal is not expected to be an instant cash generator. To begin with, from the four months of results from Justin’s in 2016, Hormel is expecting a slightly negative impact to earnings after factoring in the expected transaction costs and fair value adjustments. After this period, Hormel is expecting accretion of US$0.01 per share for fiscal 2017.

Secondly, one cannot ignore the product likenesses between Justin’s and Skippy, Hormel’s existing peanut butter brand which it acquired in 2013. Akshay Jagdale, analyst at Jefferies asked: “Why…buy this brand when you already have a good brand equity in the whole nut butter category? Why couldn’t you take that and extend it into some other categories that Justin’s is in, for example?”

President and chief operating officer Jim Snee insisted the two had different target consumers. Skippy, he suggested, cannot quite resonate with the Justin’s consumer.

“We have had a lot of success since the acquisition of the Skippy brand. We have been able to obviously gain share, drive innovation, but also a lot of the research that we have done around the brand tells us that it’s not extendable into the space where Justin’s plays today. And so Justin’s affords us that opportunity to really be more complementary to the Skippy brand in a category that’s a rapidly growing category. We know that it attracts a younger, more health conscious on-the-go millennial consumer.”

The aims behind the acquisition are similar to those Hormel had when acquiring Applegate Farms in 2015. Hormel already had a presence in meat, had its dedicated consumers. Organic meat however, was a whole new ball game.

“A growing number of consumers are choosing natural and organic products. This deal allows us to expand the breadth of our protein offerings to provide consumers more choice,” Ettinger said of the deal at the time.

And it is evident that particular acquisition is bearing fruit. Speaking yesterday, Ettinger conceded a reported 3% volume growth in its refrigerated foods business would in fact “have been slightly down absent the Applegate added sales”.

While at the time of the Applegate deal there was some talk of possible scepticism among consumers about the Spam owner’s lack of experience in the natural, organic and antibiotic-free meat sectors and whether this could be something that would deter Applegate’s consumers from shopping the brand under the new owner, the Justin’s deal comes at a time when Hormel has really worked to reposition itself as a manufacturer concerned with the health and well-being of its consumers. Recent moves to demonstrate this have included the cutting of sugar and fat in its Muscle Milk protein shakes and a company-wide “clean label initiative” that sees it simplify the ingredient statements on “many” of its retail products. These moves, together with the ownership of the organic, natural Applegate Farm brand, could go some way toward retaining Justin’s existing customer base and convincing new consumers to trust Hormel as a true purveyor of better-for-you goods.

Moreover, Ettinger’s confidence in the success of Justin’s stems from what he believes is an acquisition of the brand at the right time.

“The growth that the business has seen over the last several years, clearly, we are earlier on the growth curve than we have been with some other acquisitions, which we are quite frankly excited about”.

And it is clear Hormel is banking on the long term gains of the proposed acquisition. Jody Feragen, EVP and CFO at Hormel Foods, said supply chain synergy gains will be “implemented over the next several years”. 

Analyst at Morningstar, Zain Akbari, reacted favourably to the planned deal saying Justin’s should complement Skippy and will add “premium offerings and bolster non-peanut butters in an on-trend category”.

“Justin’s natural and organic orientation should offer Hormel additional supply chain insights and raw material sourcing benefits as it expands its non-meat offerings aligned with the health trend. We believe the firm should be able to extract more from Justin’s than other packaged goods peers due to Hormel’s existing nut butter capabilities and distribution as well as a management team with a history of achieving differentiated growth in the space,” Akbari suggested.