General Mills gained market share last fall, even though its prices were higher. Meanwhile, ConAgra Foods Inc. learned a tough lesson in pricing and branding as its consumer foods volume slipped in the second quarter, which ended Nov. 23, reports The New York Times. Quoting Edward Jones analyst Matt Arnold, ConAgra Brands such as Banquet, Hebrew National and Slim Jim don’t appeal to consumers as strongly as General Mills’, which is why ConAgra’s price increases didn’t hold up as well.
Shanahan points out that in the 2002 and 2003 recessions, innovation and new product development were hampered. And he fears the same may happen this year.
“There will be some innovation, but it will be well thought out,” he believes. “This year there will be a bit more dramatic innovation on shelves and more marketing efforts to basically maintain brands. [Product] innovation will be relatively flat for some, but profitable companies such as Coca-Cola and PepsiCo rely on innovation to maintain profitability. The industry is still somewhat recession-proof, but maintaining brand loyalty is the key in 2009-2010.”
On the subject of organic foods, Shanahan thinks they’ve plateaued under current economic conditions. Erin Ashley Smith, analyst at New York’s Argus Research Co. (www.argusresearch.com), thinks consumers are becoming more mindful of what’s in their food.
“Since food companies have been raising prices to offset commodity and currency-related effects, the pricing gap between regular and organic products is closing, which may make organic products more popular to consumers.”
Through adversity, opportunity will come. “The silver lining to the recent decline is that it has created tremendous buying opportunities,” said Gregory Dorsey, contributing editor to Leeb’s Income Performance Letter (www.leebincomeletter.com). He thinks consumer staples will perform well in a tough economy.
“Safe haven” is a term heard often when analysts discuss food stocks. But Ralston of Zacks Investment thinks the safe-haven thinking will be short lived. “I’ve been bullish on the food industry for the last three years. Despite rising commodity costs, which began in mid 2004, these stocks have been outperforming the market. But I’ve followed the industry for a significantly long period of time, and noticed when they start to outperform the market it’s for about a three year period. So, on a macro level and stock performance level, I think food industry stocks will begin to underperform the market.”
Ironically, an economic recovery could contribute to this underperformance. “What we are going to see in the market is the hope of a recovery in the second half of the year,” Ralston continues. “Somewhere in the first quarter, when the figures come out, portfolio managers will sell their consumer defensive staples like food companies and will buy economically sensitive stocks.”
PICKS AND PANS
+ “Walk down any aisle in the grocery store and you will see GIS [its stock symbol] products on the shelves. From a top-down viewpoint, the appeal of this company is clear. If the economy weakens substantially, GIS should perform better than others as their business is recession-proof.” (Sean Hannon, president of Epic Advisors LLC)
+ “With a 3 percent yield, great management, an ability to raise prices in this environment without losing a substantial market share to the private label brands, all with tempered expectations, will allow for strong performance in the next 12-18 months.” (Chris Lynn, JC Investment Management)
+ “I really like Campbell Soup; they have a very wide products line, they control their category well, are proactive in their marketing and have no qualms attacking their competitors.” (Christopher Shanahan, Frost & Sullivan)
+ “Kraft Foods is close to a 4 1/3 percent yield and their debt level isn’t onerous.” (Steven Ralston, Zacks Investment Research)
+ (In December, The Motley Fool upgraded Kraft Foods to its highest-possible rating, five stars.) “Kraft …has taken steps to cut costs and spend more on advertising to attract customers. Price hikes have also helped improve revenue, and Kraft's sales rose 19.4 percent to $10.5 billion in the third quarter.” (Dave Mock, The Motley Fool)
+ “Kraft Foods had a few issues last year, their margins shrank a bit and they won’t be growing too much, but they have strong brands.” (Shanahan)
+ “Our top pick of the year. They are going through a dramatic restructuring and, historically the management at Sara Lee has been adept and professional and able to accomplish their plans.” (Ralston)
+ “Sara Lee has strong growth in European countries and Latin America.” (Shanahan)
Hormel Foods Corp.
+ “Hormel represents real quality in the packaged foods sector. Products are well-positioned to deliver unit volume growth in FY09 and FY10 as they are on trend with a consumer that is spending cautiously – and a consumer that more and more shops at Wal-Mart.” (Timothy Ramey and Theresa MacPherson, D.A. Davidson Co.)
+ “From Gatorade and Tropicana to Frito-Lay and Quaker Foods, PepsiCo has built a $42 billion global empire marketing drinks and snacks that consumers are likely to buy through thick and thin, making PepsiCo the classic consumer staples company. Over the next several years, we expect PepsiCo’s earnings to grow at an average annual rate of 10 percent or more.” (Gregory Dorsey, Leeb’s Income Performance Letter)
+ “Pepsi has been gaining share from Coca-Cola in key noncarbonated beverage categories.” (Alton Stump, Longbow Research)
+ “In times of economic uncertainty, consumers take solace in comfort foods. With consumer spending weak, people increasingly are eating at home instead of out. H.J. Heinz is a good way to capitalize on this trend.” (Dorsey)