Packaged-Food Companies' Revamp Efforts Fall Short for Investors
August 24 2017 - 5:00PM
Dow Jones News
By Annie Gasparro and Cara Lombardo
Trouble for packaged-food companies is deepening.
Smaller companies such as J.M. Smucker Co. and Hormel Foods
Corp. are the latest to face investor pressure as volatile
commodity prices hurt margins and consumers gravitate away from the
older brands that have anchored many established food-makers.
Shares of the jam and Spam makers fell about 10% and 6%,
respectively, on Thursday, dragging down the broader S&P
500.
Smucker said weak sales of Folgers coffee and Crisco shortening
hurt earnings in its most recent quarter, leading it to lower its
earnings forecast for the fiscal year. Chief Executive Mark Smucker
said the company must more quickly overhaul those and other older
brands to appeal to consumers gravitating toward upstart products
they see as more healthy or sustainably produced.
"There are a lot more brands out there," he said.
Shares in Mondelez International Inc., Conagra Brands Inc. and
Campbell Soup Co. also fell, extending losses this year for food
makers wrestling with the big shift from mass-market brands to
fresher and more natural offerings. Kraft Heinz Company and Kellogg
Co., which both reported sales drops this month, also saw their
shares drop. The S&P fell about 0.2% on Thursday to
2438.77.
The slump is also weighing on advertising companies that rely on
huge marketing campaigns by big food and consumer-goods companies.
Hormel said it spent $24 million on advertising in the latest
quarter, less than half what it spent in that period a year ago.
Shares in WPP PLC, the world's biggest advertising company, fell
nearly 11% on Wednesday after it reported a significant slowdown in
ad-buying.
Like their larger rivals, Smucker and Hormel said they are
removing artificial ingredients from older brands and adding more
simpler, grab-and-go products and fresh meats. Smucker has also
tried to bolster its peanut butter and natural pet food brands to
offset falling demand for highly processed products like Pillsbury
cake mix. But Mr. Smucker said Thursday that promoting new brands
won't be enough to put his company on better footing if demand for
legacy products continues to erode.
"We must also focus on larger, more significant platform
innovations on some of our key and larger iconic brands," he
said.
Smucker's results reinforced "just how hard it is for big food
companies to sustain momentum in a hostile retailer and competitive
environment," Bernstein analyst Alexia Howard said. Grocery stores
have pushed big brands to lower their prices in recent months to
avoid losing shoppers to discount chains.
Hormel said low grain and turkey prices put pressure on the meat
company to cut prices on its Jennie-O turkey products. At the same
time, Hormel said higher pork and beef costs had hurt margins and
sales of other products.
"Commodity markets have been challenging to forecast," Chief
Executive Jim Snee said. Other Hormel brands including Skippy
peanut butter and Spam saw sales improve.
Some companies have looked to emerging markets to offset
lackluster U.S. sales. Hormel said it would buy Brazilian sausage
and salami maker Cidade do Sol for around $104 million. Brazil's
economy has improved recently after several years of political
turmoil and poor growth, which Hormel hopes will lead consumers
there to buy more meat.
"Strategic international growth is important to Hormel Foods and
South America has been of interest to us for several years," Mr.
Snee said.
Another recent Hormel purchase, Muscle Milk-maker CytoSport
hasn't panned out. Hormel's specialty food sales, including the
Muscle Milk products, declined 7% in the most recent quarter.
Mizuho Securities analyst Jeremy Scott said the 2014 deal was a
cautionary tale of what can happen when traditional food companies
pick the wrong brands in attempting to expand their product
offerings.
"The ready-to-drink protein category has expanded significantly
in terms of the number of competitors," Mr. Scott said. "You're
seeing the protein angle everywhere."
Write to Annie Gasparro at annie.gasparro@wsj.com
(END) Dow Jones Newswires
August 24, 2017 16:45 ET (20:45 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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