Acquisitions are one of the easiest ways of expanding a company’s business in terms of products as well as sales. Since consumer tastes and preferences keep changing, there is need for retailers to adapt accordingly. New products and offerings can be added through a company’s innovative techniques or by acquiring other businesses which offer such products.
A typical example here is that of ConAgra Foods (CAG), a provider of packaged foods. ConAgra foresaw the growing demand for private label products and decided to acquire Ralcorp Holdings in January last year. This move helped the company to go a long way in boosting its results as evident from its recently reported second-quarter results. ConAgra’s results beat the Street’s expectations, giving investors every reason to be joyful this holiday season.
Driven by growth across its three segments, revenue jumped 27% to $4.71 billion over last year. Adjusted earnings, too, increased 9% to $0.62 per share, surpassing the estimate of $0.55 per share. Sales from the commercial food segment increased 3.1% to $1.6 billion as the retailer benefited from the addition of Ralcorp’s foodservice business.
In fact, growth in the private-brands segment was splendid as it grew five times over last year, clocking in $1.1 billion. The credit for this jump goes to the inclusion of Ralcorp’s private label brands, which boosted revenue for the quarter. However, sales from the consumer segment were flat at $2 billion due to lower prices.
Although ConAgra has been an excellent performer, there are various challenges ahead. First, demand for natural food has been growing considerably. Consumers have become health conscious. Therefore, they want to buy food which is made of organic and natural ingredients. This poses the threat of losing customers since demand for ConAgra’s products might take a hit.
Also, with the cuts in SNAP food stamps, people might start cutting down on their purchases. Hence, ConAgra is taking measures to adjust to the change in consumer shopping pattern so that its sales are not hampered.
The packaged foods company lost a food service customer in its Lamb Weston potato business, which led to lower sales in the commercial food segment. However, the retailer is trying to recover from the loss and improve its results in the coming months.
ConAgra is confident about its prospects as reflected by its outlook. The retailer reaffirmed its earnings guidance of $2.34 to $2.38 for the fiscal year. This is mainly because the company expects that the benefits of the Ralcorp acquisition will continue going forward. In fact, Ralcorp is expected to add $0.25 per share during the current fiscal year. This highlights the importance of the buyout for the food company.
However, ConAgra is not the only company to use acquisition as its key source of growth. Even food manufacturer TreeHouse Foods (THS) resorted to a similar strategy. TreeHouse acquired Associated Brands in October this year in order to expand its presence in the private-label packaged food products. This acquisition will not only add new products to the food retailer’s portfolio, but also increase sales by $200 million and earnings per share by $0.14 to $0.16 per share. In fact, TreeHouse has also acquired other companies such as Cains Foods and Naturally Fresh, which played an important role in driving the company’s revenue higher.
Branded food retailer J.M. Smucker (SJM) acquired Enray in August last year. Enray manufactures premium organic food. Hence, addition of this company expanded J.M. Smucker’s products portfolio of organic and natural food products. By adding Enray’s gluten-free ancient grain products, J.M. Smucker will be taking the advantage of the growing popularity of natural food since people are becoming increasingly health-conscious. Additionally, the acquisition will lead to an increase of $45 million in the annual sales of Smucker .
Coming back to ConAgra, the company is also taking measures to attract more customers. It has been focusing more on in-store merchandising efforts and promotion of their products instead of spending more money on advertising. Moreover, it is boosting its private brands business to make it even more profitable. For example, it has initiated a sales team structure in the segment which should help in growing sales.
Hence, ConAgra seems to be right on track with a great product portfolio and increased promotional efforts. It has been able to overcome many challenges and its future looks bright. Its products are expected to attract more customers, leading to growth, which is why investors should take note of this food company.