ConAgra Still Struggles to Boost Margins

10/04/2004

ConAgra CEO Bruce C. Rohde recently announced the dawn of a new era at the company that he said is "healthy, slim, and ready." Insiders knew the remark was a reference to three of the food giant's products -- Healthy Choice, Reddi Wip, and Slim Jim -- and also a concise summary of the current shape it's in: Slimmed down and ready to take on food marketing giants such as Kraft and Nestlé.

Trouble is, the financial results Rohde announced Sept. 23 seemed to indicate that while sales are growing nicely, ConAgra is still struggling to boost margins. For the fiscal first quarter, ended Aug. 29, net earnings fell 30%, to $135 million, on sales that jumped 8%, to $3.5 billion. The stock barely budged, closing at $25.63 on Sept. 27, more or less where it began the year.

The $20 billion agribusiness giant, headquartered in Omaha, Neb., once glided effortlessly along, delivering a 20-year string of 14%-per-year earnings hikes by selling everything from tons of commodity beef and chicken to Butterball turkeys and Banquet dinners. But product recalls and commodity prices' plunge to 25-year lows in the late 1990s made the beef and chicken markets highly volatile.

So, over the last two years, ConAgra has been undergoing a radical change. Ditching commodity operations, it has focused on more glamorous -- and profitable -- packaged foods. That shows in Rohde's recruiting: Of ConAgra's top 400 executives, half came from other consumer-products outfits. Among the key recruits are Allan Lutz, brought in from Nestlé to run ConAgra's food service operation, and Roger Berdusco, who came in from PepsiCo, where he was the star marketing boss at Tropicana.

In theory, focusing on prepared foods is a smart move. As recently as five years ago, commodities accounted for more than 50% of sales at ConAgra, which had its beginnings as a Nebraska flour miller. But that total dipped to 17% in the fiscal year ended May 30, after the beef, pork, poultry, and cheese operations were jettisoned. Many investors approve of Rohde's strategy. "I applaud the direction that ConAgra is taking," says Jim Kirk, portfolio manager of the Fifth Third Disciplined Large Cap Value Fund, which holds the stock. "Being a branded food company means earnings will become more consistent."

Not everyone shares Kirk's optimism. To take on Kraft, General Mills, and Nestlé in packaged foods, ConAgra must master advertising, distribution, promotions, and all the other elements of building a brand. Last year, ConAgra's ad spending totaled $194.5 million, according to TNS Media Intelligence/CMR. That's peanuts when compared to the $847.6 million that Kraft spent on ads in the same period, or General Mills' $616 million ad budget. (ConAgra won't discuss details of its ad spending but does say it will be increasing.) In the fiscal first quarter, ended Aug. 29, packaged-food sales increased 9.4%, to $2 billion, but operating profits rose just 2.5%, to $213 million.

Critics say ConAgra's brands aren't necessarily the top names, making it tough to get them more shelf space. The company, some suggest, may end up buying better-known brands to boost its portfolio, especially given CEO Rhode's penchant for making deals. Credit Suisse First Boston analyst David C. Nelson thinks Kraft brands such as Stove Top, Minute Rice, and Shake 'N Bake could be tasty additions to ConAgra's wares. Kraft couldn't be reached for comment.

ConAgra is taking other aggressive steps to improve marketing. Even as he searches for a chief marketing officer, Rhode has hired as a consultant Sergio Zyman, the legendary former chief marketing officer for Coca-Cola, where he was credited for putting the fizz back in the beverage giant's sales. Zyman admits that ConAgra has several "me too" brands, but he believes that it can substantially boost market share by maximizing and extending their potential. Says Zyman: "These are diamonds in the rough."

Zyman cites as examples Healthy Choice soups, which could likely be expanded, as well as line extensions of products such as Pam's cooking spray. Portfolio manager Kirk from Fifth-Third agrees: "ConAgra can grow a second- or third-tier brand into first-tier with the right marketing people and clout in its distribution channel." ConAgra is already trying to raise its marketing profile by signing promo deals for the Banquet NASCAR Team with star driver Bobby Labonte and Joe Gibbs Racing.

Conagra's marketing team is also mapping out current consumer trends to see how brands can be made to mesh with trends in fitness-conscious eating, the Healthy Choice line being a prime example. Another strategy: Broadening the Banquet franchise, which has already seen Homestyle Bakes, launched in 2002, become a leader in its category, with $120 million in annual sales.

Rohde is also filling holes in his lineup by adding outside brands. Last year he made a deal with celebrity chef Wolfgang Puck for a new line of frozen pizza, which Target sells nationwide. Industry sources say Puck's pies are doing well. Swapping the stockyards for upper-crust pizza exemplifies the transformation Rohde envisions for ConAgra. All he needs is for the marketing savvy to sharpen consumers' hunger for more of his products.