TreeHouse Foods, a business not even five years old, has built a strong presence in the US private-label space. After a spate of acquisitions in 2006 and 2007, the downturn has fuelled the company’s growth but, with the big brand-owners competing aggressively, TreeHouse has again reached for the chequebook. Dean Best reports.
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Over the last couple of years, TreeHouse Foods, the US group that makes private-label products ranging from powdered creamer and pickles to salsa and sauces, has kept its powder dry on acquisitions.
The company was only formed in 2005 after dairy giant Dean Foods spun off its speciality foods business and created Bay Valley Foods.
That June, Treehouse was listed as Bay Valley’s parent company. TreeHouse then spent much of 2006 and 2007 snapping up businesses in categories including soups, salad dressings and jams as it built its presence in the private-label business.
However, after buying E.D. Smith & Sons, Canada’s largest private-label manufacturer, in June 2007, TreeHouse has been busy integrating its slew of acquisitons, as well as, of course, navigating the recession.
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By GlobalDataWith US consumers embracing private label more and more, TreeHouse has enjoyed a relatively decent downturn. In November, when TreeHouse reported its third-quarter numbers, the company also lifted its earnings guidance for the full year, with chairman and CEO Sam Reed insisting that private label “continued to be a strategic focus of our grocery customers”.
TreeHouse repeated the trick yesterday (21 December) when it again increased its profit forecast for 2009. However, the higher target was overshadowed by the news that TreeHouse had got its chequebook out again, this time to the tune of US$660m.
Sturm Foods, the private-equity owned private-label business, was the target as TreeHouse looked again to boost its presence on US grocery shelves. Reed said the deal would add hot cereal and powdered soft drink mixes to the company’s portfolio and give the business the market-leader position in a number of categories.
Reed said: “TreeHouse will have the top market share in six complementary private-label categories, and we will further expand our center-of-store offerings, where grocery sales and profits are driven.”
TreeHouse said the acquisition of Sturm would boost sales and earnings – the company said the deal would be 16% accretive on an annualised basis – and the market seemed to welcome the deal. Shares in TreeHouse jumped more than 12% yesterday.
Ken Goldman, an analyst at JP Morgan, said TreeHouse’s shares had “lagged the market” in recent months amid concerns over the prospects for private-label manufacturers as the US economy slowly recovers.
There has been some noise from the larger US brand-owners and grocers that private-label growth is slowing.
Last month, HJ Heinz president and CEO Bill Johnson said slowing private-label growth presented an opportunity for “strong brands like Heinz”. The company then announced a “minimum” of a 20-25% increase in marketing investment over the next six months.
Meanwhile, Delhaize, the Belgian parent of US grocery chains Food Lion and Hannaford, also said last month that increased promotional activity from national brands had slowed the growth of own label in the country.
Goldman agreed that private-label sales had slowed but he still saw a buoyant outlook ahead for TreeHouse.
“Growth of private-label food as a whole has slowed down. But this slowdown comes against some very difficult comparisons with 2008, and we see no indication that the average consumer is turning back to brands on a sustained, meaningful basis,” Goldman wrote in a note to clients.
“So while TreeHouse may not take as much share in 2010 as it did in 2008-09, we still believe, based on the weakness in the consumer and the desire of retailers to sell more store brands, that its growth will continue to outpace branded growth in food.”
TreeHouse’s acquisition of Sturm will give the company greater scale to compete with the big brand-owners in the US, which are continuing to fight aggressively for shelf space. And, with the Sturm deal also giving TreeHouse a presence in new categories, the company will have a wider portfolio to put to its retail customers.
The prospects for investors look strong. Goldman also suggested that TreeHouse could make a “another large acquisition a year or so from next March” when the Sturm deal is set to be finalised, which, he argued, could again drive up earnings per share.
In any case, TreeHouse’s deal to buy Sturm just four days before Christmas could signal a wave of consolidation in the private-label space in 2010. Fighting the big brand owners in a slowly recovering market is likely to require the own-label makers have greater financial resources and scale. TreeHouse and its peers are unlikely to be keeping their powder dry.
