Campbell Soup Co. has gone on quite the acquisition spree of late as it looks to rebalance its portfolio. From US chilled foods firm Bolthouse Farms, and organic baby food maker Plum, to this week’s deal to acquire Kelsen, Campbell is trying to boost its presence in high-growth categories and high growth markets. At the same time, the firm is making continued progress in revitalising its core US operations. Katy Askew reports.
Campbell Soup Co. is facing a challenge. The majority of sales are generated in mature categories – baked snacks, beverages and soups – in the highly-developed and competitive US market.
While, on the one hand, Campbell needs to ensure its core, slower growth, higher margin US business is in good health, on the other the company must look to the future and lay out a path for growth.
Since Denise Morrison took the helm as CEO, Campbell has been working to do just that. Campbell management is pursuing a “dual mandate” that has seen it strengthen the core US businesses, while also seeking opportunities to invest for long-term growth.
Campbell has made strides in improving the profile of its US businesses – which had been witnessing a slow decline. The company has worked to invigorate the soup and simple meals category through a focus on innovation, brand building and execution. The result has been a steady lift in sales. Similar actions have proven equally as effective in baked snacks, with Pepperidge Farm cookies and Goldfish crackers benefiting from a lift in volumes. The same game is being applied to US beverages, although mounting competition and category softness has meant the results have been somewhat muted.
The strategy is consistent and the aim clear: Campbell hopes to generate stable, profitable growth across its core portfolio.
Nevertheless, we are not going to see mammoth revenue growth here. While innovation is essential to maintaining the brand-position of Campbell’s stable – which includes the likes of its namesake soups, Pepperidge Farm and V8 juices – the return on investment for line extensions is never going to be breathtaking.
Rather, Campbell hopes to chip away at the competition, grow its share and extend its lead in essentially stagnant categories. Perhaps as a category leader the group will be able to play its part in stealing some sales from other sectors – and there is an opportunity in simple meals to achieve that. But the scope for growth remains limited. The key to Campbell’s strategy in its core business is the delivery of stable returns – in relatively high-margin, high-value, big-brand categories.
That is not to say Campbell is lacking ambition to get its top line moving in a big way. After years in the doldrums, Campbell’s aspirational management now plans to change the growth trajectory of the company. Morrison argues that can be achieved by carving out a presence in faster-growing categories and geographies.
The US grocery sector is not frequently thought of as presenting high-growth opportunities, but there are pockets of growth. Through M&A Campbell has sought to expand in areas where it sees significant potential for expansion.
Almost a year ago, the group acquired carrot-to-sauce company Bolthouse Farms. According to data from Campbell, Bolthouse has provided the group with access to the US$12bn packaged fresh foods category, a sector growing at 6-7% a year – well above the food industry average.
For James Richardson, senior vice president at Hartman Strategy, the consulting arm of market researchers The Hartman Group, the Bolthouse acquisition was “an extremely smart move”. Not only does it open up a high-growth sector at a time when the US grocery sector is witnessing continued polarisation – with growth at the top and bottom and contraction in the middle – it increases Campbell’s exposure to the top end of the market.
“It certainly makes sense to get more business from the upmarket end of the US population. This is the 10-20% of the US population with the most money, they are educated and educated people right now in the US spend more money on food and they are ratcheting up their spend. You’ve got to chase the fat wallets,” Richardson says.
“The more you can get your portfolio out of the value-conscious consumer base in this country, the better. You’re not going to get completely get out of the value consumer shopping base – it’s just too big in this country – but certainly rebalancing to get more of those upmarket folks buying your product is very important.”
Similar thinking can be seen in the group’s recent acquisition of organic baby food maker Plum Organics. Morrison said the move was “another step toward our long-term goal of shifting Campbell’s centre of gravity”.
The acquisition, for an undisclosed sum, marks Campbell’s entry into the organic baby food sector, a market proving attractive to larger food manufacturers. And its easy to see why. Around $2bn of baby food is sold in the US each year, Campbell said. While the majority of sales remain in the hands of conventional baby food manufacturers, such as Nestle‘s market-leading Gerber, growth in the sector lies with upmarket challenger brands like Plum. Between 2010 and 2012, Campbell said the “premium” and organic segments of the baby food category grew at at an average annual rate of 43%.
From this recent flurry of activity, one could be forgiven for thinking that Campbell’s focus remains firmly in carving out growth in the US market. Not so. Campbell has repeatedly insisted it is targeting international expansion through M&A or joint venture agreements. It has not been put off by, for instance, its exit in 2011 from the Russian market.
The company, management has said, is working on developing a pipeline of acquisition opportunities. And the group’s capacity within its balance sheet provides it with the financial capital to pursue opportunities.
So what has been the hold up? Put simply, the “good, value-accretive acquisition targets or partnership opportunities” that Campbell is seeking in growth markets such as Asia and Latin America are few and far between.
But this week Campbell acquired Danish baked snack maker Kelsen Group. The deal, for an undisclosed sum, would seem to tick all the boxes. Kelsen operates in one of Campbell’s core categories – baked snacks. It sells its brands, including Kjeldsens and Royal Dansk, in 85 countries around the world and benefits from distribution networks in Asia, South America and the Middle East.
Campbell emphasised Kelsen is “a market leader in the assortment segment of the sweet biscuits category” in China and Hong Kong. Kelsen has been exporting into China for more than 20 years and its brands have grown at a compound annual growht rate of 28% for the past three years.
Kelsen will continue to operate on a stand-alone basis, suggesting it is perhaps unlikely Campbell will look to start selling Goldfish crackers in Beijing. Perhaps the humbling experience of beating a retreat from Russia has driven home the need to deliver local brands that meet local taste preferences.
Nevertheless, should Campbell wish to pursue them, cross-selling opportunities could see some of Campbell’s products being fed into some of Kelsen’s distribution networks.
Morrison said: “Kelsen will give Campbell a solid platform for growth in baked snacks in China and for the expansion of our international footprint.”
The acquisition – and the emphasis on delivering a diversified and localised offering to international markets – was welcomed by Morningstar analyst Erin Lash.
“Campbell has resumed making acquisitions to build out its global footprint, which we view favorably in light of the fact that tastes and preferences for packaged food offerings vary around the world,” Lash said.
However, the analyst also sounded a note of warning. “While we applaud the firm’s efforts to enhance its positioning in the global biscuit category, the addition of Kelsen doesn’t address the challenges that Campbell still faces in its domestic soup and beverage operations. We hope management doesn’t get sidetracked integrating recent acquisitions and continues to exert significant energy toward righting its high-margin domestic soup operations.”
In other words, even as Campbell turns its attention to delivering on the second prong of its “dual mandate” management must also keep an eye on the first part of its strategy and maintain momentum in its core activities.