ConAgra Foods, the US food giant, will see its business performance improve over the next six months, its chief executive has insisted, after the company booked falling first-half profits.
Gary Rodkin, ConAgra’s CEO, believes the company, which issued two profit warnings in the first half of its fiscal year, will benefit from its moves to increase the prices on its products and generate cost savings.
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ConAgra yesterday (21 December) posted a 16% fall in second-quarter profits, which led first-half earnings to drop 14%. The company said the fall in profits was due, in part, to its promotional activity not paying off as it had hoped.
Rodkin said US consumers had been changing how they shopped in recent months, which meant ConAgra’s promotions had been less effective.
“Consumers are shopping from lists, making more quick trips to the store instead of stocking up as much, and being as value-conscious as we’ve ever seen,” Rodkin said.
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ConAgra, which counts frozen food and ambient canned products among its portfolio, had been affected by shoppers stocking up less, the company’s chief executive admitted.
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By GlobalData“To be specific, some of our brands are often stock-up products. Shoppers have reduced their pantry inventories, and are shifting a bit more to a just-in-time mode. In response, and in collaboration with retailers, we’re looking at downsizing some of our club-store packs and we’re also considering some changes to our merchandising multiples,” Rodkin explained.
However, Rodkin insisted the outlook for ConAgra was brighter in the second half of its fiscal year. He said price increases, more cost savings, contributions from new products and recently-acquired businesses would help ConAgra’s consumer-foods business, while a “higher-quality” potato crop would boost its B2B business.
Rodkin said rising input costs – ConAgra has estimated that those costs would rise 5-6% over the whole fiscal year – meant moves to increase prices on its consumer products were vital.
“Given the size of the inflation we’re experiencing, and which we expect to continue, cost savings cannot fully offset it, which is why pricing actions are necessary,” Rodkin said. He admitted price hikes could lead to a “modest risk” to sales volumes but added: “This is a trade-off we’re willing to make because it’s the right business decision. We simply cannot have deflationary, or even flat, pricing in light of significant and accelerating input cost inflation.”
ConAgra has already moved to raise prices on its cooking oil, table spreads and some snack products, with further hikes to come.
However, not of all of ConAgra’s products will become more expensive. In the frozen entrees category, the company plans instead to reduce the “depth” of its promotions in what remains a very competitive category, Andre Hawaux, the head of the group’s consumer-foods business, said.
“That category historically, and I believe in the future, will continue to be a very promoted category. It is one where on average one of the major companies has something going on every week. I don’t believe that’s going to change,” Hawaux told analysts. “Based on some of the inflation that we’re seeing, we are going to continue to try to maintain the same level of frequency [of promotion] but the depth is something that we’re going to have to come off of.”
Not all analysts were convinced about the optimism ConAgra had for the second half of the year. Citi analyst David Driscoll said investors were “a little nervous” that, after ConAgra’s profit warnings, the company was “being maybe too optimistic”.
Rodkin replied: “I think the most important point is to understand that this is not a ConAgra issue alone. We believe all of our competitors, all of our customers, are suffering from the same issues of pricing down and commodity costs significantly up, and that is not a sustainable strategy for anybody. So we do believe that we will see more rationality in the marketplace come the second half. We also have, as you know, easier overlaps, because last year’s first half was stronger than the second half.”
Shares in ConAgra closed down 0.2% at $22.40 on the New York Stock Exchange yesterday.
