Net sales for the segment climbed $62.3 million to $565 million and profits rose $17.5 million to $155.1 million in the first quarter ending July 31 – evidence that Smucker’s ambitious five-point plan to get the floundering coffee segment back on track is working.
The plan, announced in February, includes ensuring consistent taste profiles, transitioning Folgers roast to a more competitively priced smaller canister, restructuring costs to lower prices, promoting premium coffee partnerships and capitalizing on the K-Cup trend.
The last two prongs were a major contributor to the sales boost in the first quarter with the company’s May 1 launch of Dunkin’ Donuts K-Cup pods, which are performing better than expected, CEO Richard Smucker told investment analysts.
The launch included 100 million cups and strong merchandising support, including nearly 40,000 retail displays, that helped the new product capture 5% of the K-Cup dollar share, Smucker said.
He added distribution and marketing support will continue to expand and should help Dunkin’ Donuts K-Cups continue to grow and gain share.
Price cut helps
The firm also took action on the pricing prong – lowering the price of packaged coffee products, excluding K-Cups, 6% across the board in July.
The price cut was in anticipation of green coffee costs lowering although they had not done so yet when the cut was announced, according to the company.
However, another motivator for the decrease could have been to bring the firm’s prices back in line with competitors' prices following its ill-fated decision in June 2014 to increase prices 9%.
As a category leader, Smucker’s expected competitors to follow its lead and raise their prices, but many did not. This caused some sticker shock at the shelf for consumers who increasingly are not brand loyal.
The firm also passed savings to consumers by launching a smaller Folgers’ canister that allowed its price to appear more in line with competitors, executives said. They acknowledged, however, this switch resulted in a 9% volume drop for the brand in the quarter, which was expected.
Guidance remains the same
Despite the better than expected first quarter for coffee, Smucker’s did not boost its guidance for the segment. Rather, it reiterated mid-single digit profit growth.
Steven Oakland, president of coffee and food services, explained one reason for the conservative stance is that the company anticipates more promotional spend in the second quarter, which will be compared against a lower than average marketing spend in the same period last year.
In addition, he said, the firm will invest more heavily in marketing for the launch of Perfect Measures, which the company claims is “one of the first innovations in roast and ground in some time.”
With that in mind, he said, “if you normalize marketing you’d see much better year-over-year comparisons.”
The strong performance in the coffee segment, along with the addition of Big Heart Pet Brands, helped the firm’s overall net sales increase 47% to nearly $2 billion and operating income to increase 37% to $81 million compared to the same time last year.