ConAgra Foods CEO Gary Rodkin has defended the US company’s decision to increase prices on certain products as it sought to offset soaring commodity costs, even as cautious consumers baulked at the hikes.
During 2011, food manufacturers in the US increased prices to try to absorb increased raw material costs but, in the latter part of the year, the higher prices hit sales volumes.
There have been some signs that volumes remain under pressure. ConAgra’s fourth-quarter results, published yesterday, showed volumes from its consumer foods business fell 5% on an organic basis. Sales revenue increased 6% thanks to the benefit of price increases and the company’s recent acquisitions.
Rodkin said lower sales volumes of ConAgra’s Banquet brand equated to a “meaningful portion” of the overall decline in volumes from the company’s consumer division. However, he defended ConAgra’s decision to increse prices on Banquet and said although the company’s overall volumes will fall over the next 12 months, they should improve as the year progresses.
“We took pricing on Banquet earlier this fiscal year to deal with commodity inflation, and as a result, the retail price charged by customers crossed the $1 price point at most retailers. With value-oriented consumers being hit the hardest in this economy, there was volume decline as a result of this pricing, but the increase was the right thing to do to address inflation and keep Banquet profits healthy,” Rodkin said. “We’re satisfied with our pricing actions this year.”
Price increases helped boost profits from ConAgra’s consumer foods business in the fourth quarter. Over the whole fiscal year, operating profit from its consumer division fall 6.5% in the 12 months to 27 May.
However, underlying operating profit from the unit increased in the last three months of the year. Rodkin said the price increases were a factor.
“For the last quarter of fiscal 2012, we grew comparable operating profit in Consumer Foods, a significant sequential improvement. This was an important milestone, and we’re glad to have turned the corner in terms of year-over-year profit comparisons,” Rodkin said. “As we’ve talked before, the commodity inflation during the first three quarters of the fiscal year was very high, at 11%, and it moderated to 6% in the fiscal fourth quarter. A combination of our prior pricing actions, along with the productivity improvements have helped us fight the inflation headwinds. Contribution from our acquisitions this fiscal year also played a role in fourth quarter results, but our base business showed an increase in profitability in the fourth quarter, even without the benefit of acquisitions.”
Profits from ConAgra Foods’ consumer foods business – the company’s largest division – will improve in the next 12 months, it said. ConAgra expects easing commodity costs, a full year’s benefit from recent acquisitions and “pricing and mix improvements” will mean the division’s operating profit will improve this year.
Rodkin forecast better profits from its “base” consumer foods business, excluding recent acquisitions like pita chips firm Kangaroo Brands and breakfast products manufacturer Odom’s Tennessee Pride.
“While acquisitions completed in fiscal 2012 are expected to generate the majority of consumer foods’ profit growth in fiscal ’13, that’s not the only driver of profit improvement in our plans for that segment,” Rodkin said. “We also expect modest profit growth from that segment’s core underlying operations, meaning the base business independent of acquisitions. We’re realistic about marketplace conditions, but margin management initiatives and moderating inflation could put us in a position to post modest profit improvement and invest more in marketing for the core underlying operations.”
Rodkin also expects volumes to improve in the second half of ConAgra’s financial year as the company laps last year’s price increases and benefits from new products.
“In consumer, we clearly have talked about how volume will be modestly down this year but it will improve as the year goes on and we overlap the pricing,” Rodkin said. “We’re going to overlap those pricing actions as we get through the year eventually and we’ll also start to hopefully see consumers flatten out in terms of the behaviour of what kind of inventory they are carrying and how they’re managing their leftovers. Margins will improve this year in consumer because we are clearly going to have less severe inflation, moving more towards pull versus push and that’s why you’ve seen us to a holistic increase in our marketing dollars. We feel very good about our consumer business and we’ll see some modest growth on the organic business side and we’ll get a good boost from our acquisitions.”