Post Holdings’ incoming CEO has outlined the risks of raising prices as the US group weighs up options from the building pressures coming from the Middle East.
Before Nicolas Catoggio takes the reins in October from Robert Vitale, the current Post COO joined management on a call to discuss the company’s second-quarter results, on which he suggested Post may initially absorb costs.
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Options will largely depend on the extent of inflation from the crisis in the Middle East, with CFO Matthew Mainer indicating Post’s assumptions are that it could last for the whole of the company’s fiscal year through September.
Discussing the results to 31 March, Catoggio framed his inflation and pricing remarks broadly but also pertaining to the business he will soon lead.
“If it is in the low single digits, I think we will see more of CPGs trying to absorb that within their P&L and that could be in the form of maybe lowering promotional intensity. If it is more than that, we will probably see more targeted pricing,” he said.
“Right now, we are seeing it in fuel and a little bit impacting packaging. If things get worse, we will have to think about pricing and it is probably going to be in the new fiscal year. It is way too early to say.”
Catoggio used the example of its 9Lives pet-food brand to highlight the risks around pricing, a category where 60% of Post’s portfolio is in dry dog food, which saw second-quarter pound volumes drop 4%.
“We raised prices on a third of the brand that is more functional. As we raised prices, we saw higher elasticities than what we anticipated and we lost distribution in a couple of retailers,” Catoggio explained on 9Lives.
Similarly, less than a year ago Post encountered pricing turbulence in its Grape-Nuts breakfast cereal brand, which have since been addressed.
“We raised prices on Grape-Nuts, we saw the same elasticities, we fixed that with rollbacks in the short term, and now we have fixed it with price-pack architecture, and that brand in one of our larger retailers is growing at 40% in pounds now. So we see that as the same playbook,” he said.
Post, nevertheless, has private label in its toolkit as well as branded products as a shield against pricing pressures.
Its Consumer Brands division, for example, is the largest for own label across the business, Catoggio said.
“In terms of our position, we have a very strong position in cereal, granola and peanut butter. We are a smaller player in private-label pet; we have more of a premium private-label presence in pet. In terms of opportunities, we see opportunities in all of those categories.”
Over in the UK, where Post also has private label in cereal to complement its Weetabix brand, CFO Mainer added: “Our shares are in line with the category in terms of branded versus private label. Private label is north of 40% for us over there. We feel really good about having alternative price points, just like we do at Post Consumer Brands.
“We think that gives us a competitive advantage and inroads with retailers both on the branded side and with that private-label presence.”
Mainer said Post is already seeing the direct cost impacts from the Middle East, mainly around fuel and fuel surcharges, although some hedges are in place.
“We certainly are seeing the impacts as we got to the end of Q2 and into the beginning of Q3,” the CFO added. “It is pretty consistent, depending on the level of hedges we have in place, through the balance of the year. You can think of it as a steady run-rate assuming the war extends to the end of the fiscal year, which is our base assumption.”
Mainer also addressed the investment climate and suggested Post might be open to business spin-offs, which have been gaining traction at some of the company’s US peers of late.
During last September’s fourth-quarter results call, outgoing CEO Vitale had said Post would “continue to review M&A opportunities”.
Mainer said last week: “We continue to see some of our larger competitors talk about maybe separating portions of their portfolio. We have seen it happen already in a couple of cases in the last year. I think those are larger, more transformational transactions. We look at everything but that is something we would evaluate.”
The CFO added: “You have the smaller tuck-ins that are available that are, for us, more synergistic and obviously easier to digest. But the backdrop for us is really where our share price is trading and the implied multiple. It continues to be a high bar but we continue to look at all that is out there.”
