Price increase drags down Smucker’s coffee sales
The Orrville, Ohio-based firm announced Nov. 12 that its preliminary results for its second quarter ended Oct. 31 “were significantly impacted by volume declines in its U.S. retail coffee segment … due primarily to consumer response to higher promoted price points for its roast and ground coffee offerings in the second quarter as compared to the first quarter of this fiscal year.”
Specifically, J.M. Smucker expects the coffee segment’s volume to fall 18% and its net sales to drop 10% in the quarter, the final results and dollar amounts of which will be announced Nov. 19. This is driven primarily by a 20% decrease in volume for its Folgers brand.
If the results pan out as expected, this will be the first time in nine consecutive quarters that the firm’s coffee segment’s volume will fall. It has climbed 1% to 2% in the last three quarters, according to financial filings. Net sales for the segment, on other hand, have been sliding for the past year, dropping 8% in Q3 of last year, 12% of Q4 and 2% last quarter, according to filings with the Securities and Exchange Commission.
As a result of the most recent quarter’s drop in volume and sales, the segment’s profits are anticipated to fall 16% during the quarter compared to the same time last year.
The segment’s decline also pulled down the firm’s overall net sales for the quarter, which are expected to fall 5% compared to the same time last year. In response, the firm lowered its expectations for the full year net sales. It now anticipates they will fall 1% compared to 2014 from a previously expected increase of 3-4% compared to 2014.
“Our rapid ascent of coffee prices to reflect higher green coffee costs took its toll on volume,” which likely will continue through the remainder of the fiscal year, Chief Executive Officer Richard Smucker said in a Nov. 12 statement.
“Looking forward, we do not believe there has been a fundamental change to the at-home coffee category. However, our teams will continue to focus on tactical opportunities to address the current market environment,” he added.
Delaying the inevitable?
Smucker succeeded in delaying the full negative impact of the list price increase announced last June until the second quarter by increasing promotional spending at the same time to maintain competitive pricing, according to the firm’s earnings statement for the first quarter filed Aug. 20.
By delaying the increase in the price shoppers pay, Smucker bought itself time “to make sure that we had our pricing strategy set for the key holiday period,” Mark Smucker, president of U.S. Retail Coffee, said Aug. 20 during the firm’s Q1 earnings call with investors. That call was the first formal chance analysts had to ask the firm about the price increase to coffee products.
He added the promotions also helped bridge any delay competitors might take in raising their coffee product prices in response to the same pressures from more expensive green coffee that Smucker felt. Competitor Maxwell House maker Kraft also raised coffee prices at the same time as Smucker.
As anticipated, the promotions’ effectiveness faltered in the second quarter contributing to the sales and volume decline, the firm said.
“Competitive activity” also lowered coffee sales, the firm said. While it did not go into detail, this impact most likely came from the Keurig-cup side of the segment, which was not included in the price-increase.
The firm first experienced significant competition in the K-cup space in the fourth quarter of fiscal 2013 when sales of K-cups fell to $11 million compared to incremental sales of at least $30 million for the six previous quarters due to unlicensed competition. (Read more about the competitive impact HERE.)
Despite the competition, the business is still booming prompting Smucker and Keurig Green Mountain, Inc., in May to sign a multiyear agreement to expand the marketing and distribution of Smucker coffees in K-cups.
Beyond coffee, CEO Richard Smucker said the “balance of our businesses performed well.”
