While the “topline optics” were “ugly,” conceded CEO Sean Connolly on the company’s Q1, 2017 earnings call on Thursday, “walking away from our previous practices that concentrated on volume over value,” was the right strategy in the long-term, he insisted.
“ConAgra historically prioritized volume over value and accordingly, we've been overly reliant on deep discounting as our chief demand driver, leading us to under-invest and under-deliver on brand building and innovation.
“The result of this behavior is a revenue base that is overdeveloped in terms of the presence of low-loyalty, price-focused consumers. The problem with catering to these consumers is that: a, it caused us to neglect the needs of the vast majority of our consumer base, people who are hungry for innovation and premiumization and, b, it fundamentally limited our ability to drive higher margins.”
Are there enough loyal consumers vs ‘switchers’ to support the strategy?
One of the biggest changes in strategy has been on Banquet frozen meals, where ConAgra has reduced its reliance on deep discount promotions and raised the everyday shelf price above $1 – a move Connolly said had predictably dented volumes, but was the right thing to do strategically as part of ‘restaging’ the brand.
However, he said, “Consumer data is showing an improving buying rate from our most loyal consumers and key customers… When we're talking about incredibly, what I'll call, price-obsessed consumers who really only buy on price, it's not a large percentage of the user base. I mean, there are more brand loyal users in the user base in brands like Banquet… If you get into baseline velocities, you will see that our baseline velocities are, in fact, quite stable.
“And interestingly, even low income consumers are very interested in a brand communicating with them on other means [than price]. For example, there was a period of time in our past where our PAM business was heavily promoted and the only trick in the book that we turned to was dealing.”
However, if you look at consumer trends in oil, shoppers are increasingly buying more premium, culinary-inspired products, he said: “So instead of competing on PAM on price attributes, we've evolved the PAM business, and we've got olive oil PAM. We've got coconut oil PAM. These are relevant modern-day attributes that changed the discussion with the consumer to be about something that they value and they will pay more for and not about deep discounting.”
The key, he said, is “continuing to support the items that are moving at strong velocities, contemporizing them, refreshing them and then adding to them with new innovation and then ultimately proper marketing support.”
“We will provide data that splits our volume base across loyals and switchers, and the vast majority of our consumer base are those consumers that are loyal that buy their purchases based on the strength, the benefit, the features of our products.
“By focusing on incremental volume to trade promotion, we're subsidizing the purchases of those people that would normally buy us at full retail price. And our focus on trade is trying to improve the ROI on those merchandising events. So at the end of the day, we will have a stronger consumer base with a higher percentage of loyal consumers, and we will drive margin improvement through the trade productivity that we will invest in those attributes that those consumers are looking for over time. “
Tom McGough, president, consumer foods, ConAgra Foods
Customers are giving more and more real estate to challenger brands that have modern food attributes like natural, organic, premium
But do brands such as Banquet have sufficient equity such that shoppers could be persuaded to spend more for them, perhaps on the back of new innovations? And can ConAgra hold its ground without losing distribution?
Retailers don’t want to see a race to the bottom, insisted Connolly: “our customers are asking us for growth and innovation. They want to see us evolve our brand so that we're not competing on price, so that we're competing on quality measures.
"You see customers giving more and more real estate to these challenger brands that have modern food attributes like natural, organic, premium. These are the things that consumers are demanding, and this is what many of our retailers in our categories are prioritizing.
A recipe for disaster?
So is the strategy a sensible one?
Speaking to FoodNavigator-USA earlier this year, Dr Kurt Jetta, CEO of TABS Analytics, said Connolly was wise to embark on an aggressive analysis of the company's trade spending, but queried whether the strategy of 'weaning' Banquet customers off deals would work, adding:
"Consumers cannot be 'trained' to purchase off of deal because the products in their current form don’t have the value to warrant the full price to these people. That is the nature of promotions.We have tracked numerous CPG brands over many years, and what he is prescribing is a recipe for disaster if he intends to execute upon it."
Asked to comment on the figures on Thursday, he added: "As predicted, the reduction in aggressive trade practices had a significant – and in many instances severe – impact on their retail sales. It is far from clear that they will be able to maintain a positive profit from this action because retail sales on these brands appear to still be declining.”
Q1, 2017: Sales down, margins up
In the first quarter of fiscal 2017, ConAgra reported a 4.6% drop in net sales to $2.67bn driven in part by its "decisive actions to build a higher quality revenue base," coupled with divestitures, and the negative impact of foreign exchange rates.
However, gross profit (net sales less cost of goods sold) as a percentage of net sales expanded approximately 200 basis points behind pricing and trade spending discipline, mix improvement, and supply chain efficiencies, said Connolly. Operating profit rose 29.4% to $180.5m, while income from continuing operations totalled $188.5m, versus $167.4m in the year-ago period.
Adjusted earnings per share (EPS) from continuing operations were $0.61, compared to $0.41 in the year-ago period, beating analysts' expectations.
"What I'm focused on is that, we continue to move the centerline of our profitability north over time," he added.
- GROCERY & SNACKS (branded, shelf-stable foods sold in US retail, eg.PAM, Reddi-wip, Slim Jim): Net sales fell 5%: "More disciplined pricing and trade promotion practices resulted in price/mix increasing 1% while volume declined 6%."
- REFRIGERATED & FROZEN (branded, refrigerated and frozen food items sold in US retail, eg. Marie Callender's, Banquet, Healthy Choice): Net sales fell 8% reflecting"decisive actions to build a higher quality revenue base." Price/mix +3%, volume -11%.
- INTERNATIONAL (branded food items sold in retail channels outside the US): Net sales fell 6% mainly drive by foreign exchange.
- FOODSERVICE (foods sold to restaurants, foodservice operators, and commercial customers primarily in the US): Net sales fell 1%.
- COMMERCIAL (Lamb Weston [to be spun off asap], Spicetec Flavors & Seasonings [to be sold to Givaudan], and JM Swank businesses [being sold to Platinum Equity]: "Lamb Weston’s 4% growth was more than offset by the impact of the divested businesses."