Analyst: Campbell must invest in its brands if it is to right its ship

Analysts have welcomed Campbell Soup’s new focus on innovation and brand building to reverse its flagging fortunes in the soup fixture, but warned it could take time before the strategy delivers tangible results.

In a research note on Campbell, which posted a 9% slump in sales of soup in the fourth quarter, Morningstar analyst Erin Lash said she was encouraged by its new emphasis on reinvestment in product innovation and marketing support.

"Intense competitive pressures from retailers, private-label offerings, and other branded players are likely to persist as consumer spending remains muted, but we like that the promotional spending is taking a backseat to increased investments in marketing and product innovation that resonates with consumers.

“We think it will be crucial for Campbell to invest behind its brands, if the firm is to right its ship.”

However, these investments “could take time to yield measurable improvements”, she cautioned. “We forecast sales growth of just 0.6% in fiscal 2012.”

Promotions ‘did not generate the expected lifts’

Her comments came as Campbell admitted it had had a pretty dismal year in the soup fixture, characterized by ineffective promotional activity in the first half and volume-denting price rises in the second.

Speaking on a conference call with analysts on Friday, chief financial officer Craig Owen said soup sales dropped 9% in the quarter and 6% in the year to July 31, a lackluster performance he blamed on heavy promotional activity in the first half “which did not generate the expected lifts”, followed by a rebalancing of the marketing mix and price rises in the second half.

He added: “The overall US wet soup category declined in dollars by 1.6% in the last 52 weeks. Our soup sales in dollars declined 4.2%, underperforming the category. All other branded players saw an increase in US soup sales of 3.4% this year, while private label soup sales grew by 2.6%.”

‘We’re not expecting the first half to be easy’

But new chief executive Denise Morrison said she was confident of turning things around through better products and marketing, although investors would not see changes overnight.

We're not expecting the first half to be easy. We've had a list price increase and competitors have delayed following suit. So we expect that competitive pressures will continue.”

However, customer feedback about new products including Slow Kettle soups, Swanson flavor boost and new Prego and Wolfgang Puck sauces had been positive, she said.

“We have also begun the important longer-term process of reinvigorating our Simple Meals innovation pipeline. In this environment, it is critical for us to deliver meaningful innovation focused on consumer needs, and to differentiate our brands through effective marketing that emphasizes our products' tangible benefits and value relative to the competition.”

‘It is critical for us to deliver meaningful innovation’

The New Jersey-based firm posted a 12% drop in net profit to $100m in the fourth quarter on net sales up 5.7% to $1.6bn, boosted by favorable currency movements.

Sales in Campbell’s baking and snacking arm rose 17% driven by strong growth in Pepperidge Farm Goldfish snack crackers and the launch of Milano Melts cookies, plus growth in Chocolate Chunk Crispy cookies, Arnott's Shapes crackers and Tim Tam chocolate biscuits.

However, soup sales dipped 9%, with broth down 11%, condensed down 10% and ready-to-serve down 5%.

‘The recovery has not progressed at the pace consumers hoped for’

Overall, the Q4 figures were slightly better than expected, driven by strong gains in snacks and baked goods, said Morrison.

However, the economic climate was making life difficult, she said. “The recovery has not progressed at the pace or intensity consumers had hoped for. As a result, consumers remain careful about their purchases and feel the need for resourcefulness and vigilance."

Net earnings for the year to July 31, 2011 were down 4.6% to $805m. Net sales were up 1% to $7.72bn. Full year-soup sales dropped 6% reflecting a 9% slump in ready-to-serve sales and a 4% dip in condensed. Sales of broth were down 1%.