Company CEO Mark Smucker revealed yesterday during the CPG giant’s first quarter earnings call that it is passing through to consumers “a moderation in commodity costs” for select coffee products “that will provide consumers with increased value and some relief from inflation.”
While the move may be consistent with the company’s “historical practice of passing through lower coffee costs, while successfully maintaining profit margins and dollar profit,” as Smucker said, it is also a sharp deviation from the broader industry’s – and even its own – recent pricing actions.
For more than a year, JM Smucker has been dogged by inflation – prompting it to raise prices to offset higher costs even if it means tough conversations with retailers and potential market share losses.
But, just as the company is quick to pass on increases, Smucker says it is equally important to the business to pass on decreases, when possible.
“We did see some – a little bit of relief in the commodity, and that’s what drove us to sharpen our price points in a few of our coffee brands. That really took place in this month. So, that will start to impact and help the business going forward,” Smucker said.
“Just as a reminder,” he added, “as we manage price, we really try to be prudent. We do feel that it’s important to pass along both increases and decreases, but we do that with multiple levers. Sometimes, it’s a list price, sometimes it’s a trade or just getting a little big more surgical on pricing, and that’s really what we’ve done here. And we do expect that to support the coffee business going forward.”
Smucker stopped short of speculating whether the company would be able to replicate this move in the future for coffee or other brands.
“We would consider ourselves still in an inflationary environment,” and “we have not seen significant deflation across the industry,” including competitors lowering prices, he explained.
Deflation in the underlying green coffee will cause Smucker’s coffee segment to “be flat to slightly down” on a year-over-year basis, but the company also expects “a level of volume momentum for the portfolio on a year-over-year basis,” said CFO Tucker Marshall.
This is already playing out in the first quarter in which Café Bustelo net sales increased 22% with a volume/mix increase of 19% and consumer take away up 18% in the quarter. Folgers also grew net sales 6% driven by volume/mix in the quarter and saw a return to volume share growth. Dunkin brand also reported dollar and volume growth in the quarter, which Smucker expects to continue thanks to its recently announced price decline.
The company also plans to reinvest part of the gross profit improvement in additional marketing and innovation, such as extensions of its recently launched Dunkin cold brew concentrates, Marshall said.
“The concentrate is currently available in Black and Pumpkin Spice flavors at leading retailers. Coffee concentrate is highly convenient for consumers as it requires no brewing equipment and allows for easy customization of the strength of coffee,” Smucker explained. “We look forward to brining more no-brew innovation to the at-home market, as we continue to make investments and explore opportunities in the fast-growing liquid and cold coffee segments,” he added.
Positive quarter prompts guidance boost
Beyond coffee, Smucker’s saw strong net sales growth of 49% in its consumer foods business, thanks in part to a 43% benefit from Jif peanut butter, which is now broadly available and lapping a product recall in the prior year.
Smucker plans to support Jif and its Uncrustables frozen sandwich division with additional advertising and in-store activations – illustrating how it is reinvesting in more than just its coffee business.
Overall, the company’s comparable net sales in the first quarter increased 21%, in line with expectations and partly due to previously announced price hikes.
The positive first quarter gives the company confidence to increase its full-year guidance. It now expects earnings per share in the range of $9.45 to $9.85 – a 3% increase across the range versus its prior outlook.
'Acquisition ... will continue to play an important part of our growth story'
The company’s strong first quarter and balance sheet also allows the business to look for potential mergers & acquisitions, Smucker said.
“We have, over the last couple of years, been really focused in terms of refining our portfolio. But it does not mean that we’re not interested in acquisitions. We remain very interested,” Smucker said.
“The industry as a whole has been somewhat quite on the M&A front, but it’s not for lack of investigating and looking, keeping lines in the water,” he added. “And so, we hope that M&A will continue – or acquisition specifically will continue to play an important part of our growth story over time.”