In the prevailing economic environment where people are finding it difficult to survive the impending crisis, companies which provide the lowest rates as well as innovative products tend to win. Though there is a section of people who don’t mind splurging on branded products at any point of time, there is a large section of customers who are greatly influenced by price and promotions.
This is what is understood and followed continuously by the packaged food retailer ConAgra Foods (CAG). The company has been performing well, owing to its expansion in the low priced private label products which are faring well since it is lighter on consumers’ pockets. However, unfavorable weather conditions forced the food company to register a dull quarter. Let us understand the company better.
Driven By Acquisitions
ConAgra’s keenness of expanding its consumer products segment through a host of acquisitions has been instrumental to its success. However, lower store traffic led to 3% decline in revenue to $4.44 billion. The consumer foods segment declined 7% over last year because of lower volumes. However, the commercial food segment did well with a 1% rise in revenue mainly due to products such as bakery products, specialty potato and private label food products.
The company has strengthened its business through acquisition such as Ralcorp Holdings, which had a number of advantages. The deal not only strengthened ConAgra’s market position, but also added a number of private-labels to the acquirer’s portfolio. Additionally, the buyout will lead to cost synergies, making it even more lucrative under the current circumstances.
Most importantly, ConAgra boosted its promotional efforts and is expected to increase it further in the next few months. The move has been initiated because of restricted spending habits of consumers as well as ConAgra’s strategy of a price hike which might scare away customers. Though this affected volumes in ConAgra’s core business, the company is expected to manage it pretty soon when people get used to the new prices.
The Competitive Environment
Increase in prices was necessary for the food retailer since cost inflation had been hurting its bottom line and rivals such as General Mills (GIS) had already started reaping the benefits of higher prices. There are other reasons also which have benefited General Mills’ volumes. Its entry into the yogurt business has been a commendable one. General Mills’ introduction of a wide variety of yogurt flavors has more than helped the company to attract customers in hordes.
As people are becoming more and more health conscious, there has been a major shift of focus for food companies to natural and organic products. ConAgra took advantage of this trend. Their large variety of organic foods was amazingly accepted by the market.
On one hand, ConAgra ramped up its advertising and on the other its peer Diamond Foods (DMND) has cut down on its promotional spend. The unfavorable impact of cutting down on marketing spend showed up on Diamond Foods’ recent quarter as well as on its stock price. The stock price performance of the three industry players in the last five years shows that ConAgra is doing well.
ConAgra has been a remarkable performer, which has enabled the retailer to provide a 67.4% return to its investors over last five years, whereas General Mills and stood at 81.4% and Diamond Foods at 4.7% only. The secret of success for ConAgra lies in its acquisition strategy which helped in boosting its performance during tough times.
The Bottom Line
ConAgra has become attractive since it continues to enhance its product portfolio with a special focus on frozen meals which should be fruitful. Its acquisition of Ralcorp will also be a turning point in the journey of ConAgra. However, hurdles such as harsh winters and lower store traffic have been causing hindrances. But the company’s initiatives and upcoming spring season should bring back lost sales. On the whole, this food company looks like a good investment opportunity and investors should definitely not ignore this.