Speaking to analysts on an earnings call yesterday to discuss the firm's Q3, 2012 results, Smucker said sales were up 12% in the three months to January 31, but volumes sank 10% as the company hiked prices by 16% in a bid to recover surging raw materials costs.
He added: “Although we expected volume to decline during the quarter, the magnitude of the decline was unexpected.”
Inflation has transformed pricing architecture in the coffee category
The volume drop-off could be blamed on several factors, said Smucker, noting that “the overall volume of food and beverage sold through measured channels decreased 4% for the 12-week period ended January 22, reaching a new five-year low”, according to IRI data.
He also pointed to: “Significantly higher price points on a number of our key items" - dubbed "sticker shock" - plus "consumer pantry loading of peanut butter ahead of our November price increase, a reduction in retail inventory levels and aggressive pricing by a few key competitors and retailers”.
Meanwhile, inflation had changed the pricing architecture in the coffee category so much that even deep discounts did not look as appealing to consumers as they used to, he said.
“In our core Folgers Coffee offering, this year's promoted price point of $8.99 was 30% less than the un-promoted everyday price, but it was substantially higher than last year's promoted price of $6.99.”
Consumers will adjust to higher prices
While the Ohio-based firm planned to tweak prices in the wake of the disappointing figures, Smucker said he did “not view our quarter's results or the consumers' behavior as fundamental changes that would affect our business model”.
He added: “We are confident in our long-term strategy and expect the consumer to adapt to adjusted market prices over the coming quarters.”
Coffee prices are coming down
And on the plus side, commodity costs had generally come down with the exception of peanuts and sugar, he said.
“Coffee, which is our largest purchased commodity, has seen recent Arabica futures average around $2.20 a pound. This compares to over $2.75 a pound just a few months ago.”
If they remained lower, Smucker would likely cut coffee prices early in fiscal year 2013 (ie. May-July 2012) “and expect a positive volume impact from this action”, he said.
‘We expect to achieve over $160m in K-Cups sales this year’
Meanwhile, work on integrating the North American Foodservice hot beverage business just acquired from Sara Lee was progressing well, he said.
“We have targeted May 1 as the date we plan on transitioning customer ordering and invoicing, manufacturing and green coffee processes onto our systems.”
The Pillsbury Baking business also performed well in the quarter, while “K-Cups continued on its growth trajectory, with sales in the US increasing $38m or approximately 180% over last year”, revealed Smucker.
“We expect to achieve over $160m in K-Cups sales this year.”
We won’t see a ‘race to the bottom’ on pricing
Asked by one analyst about promotional activity in the sector, he said he did not think the trade as a whole wanted to risk commoditizing brands with too many deep discounts.
“I think - at least from my colleagues that I know in the industry – that they have recognized that, historically, if they do over-promote, that's a short-term fix.
“At least the leadership that I've seen in the industry has taken a position that brand building is the best thing for the industry.
“I guess I'm optimistic that you won't see an across-the-board race to the bottom. I think they're very brand-oriented, and I think we're going to continue to see responsible management of those brands.”
Q3 2012 results
For the three months to January 31, Smucker posted an 11.5% drop in net income to $116.8m on revenues up 12% to $1.47bn. Excluding one-time costs, the company said it earned $1.22 per share, well short of the $1.41 per share Wall Street analysts were expecting.