2014 CAGNY Report

March 17, 2014
Food and beverage CEOs give contrasting views at annual financial analysts meeting.

The very first two food companies to present at a financial analysts meeting in February were polar opposites in how they view success in the marketplace. Then again, there were a lot of contrasts among the companies speaking at the February Consumer Analysts Group of New York (CAGNY) meeting.

General Mills was all about understanding the consumer, growing overseas and celebrating its brands and spending to promote them.

ConAgra aims most to understand its retail partners, grow its private label business, find operational economies and otherwise hunker down in Omaha, Neb.

Kraft Foods Group and its onetime other half Mondelez presented a similar contrast in back-to-back presentations. The CEOs and CFOs of some of the largest publicly traded food companies make an annual pilgrimage to the meeting to "sell" their companies to financial analysts. CAGNY has been coordinating this meeting for 50 years.

Also making presentations were Campbell Soup Co., Clorox Co., Coca-Cola Co., Green Mountain Coffee Roasters, Hershey Co., Hillshire Brands, Kellogg Co., Mead Johnson Nutrition, McCormick & Co., PepsiCo Inc., SABMiller Plc and WhiteWave Foods Co., as well as some non-food consumer goods companies.

Campbell Soup CEO Denise Morrison may have uttered the most interesting quote of the week: "There's a shrinking middle class in the U.S., but growing middle classes elsewhere in the world." (See our news item on the shrinking middle class)

It was just an aside, a justification for Campbell's increasing business interests in developing nations -- Campbell acquired Kelsen A/S of Denmark last August and has plants in several countries around the globe. And it was confirmed with hard numbers by Kraft CEO Tony Vernon. But it stung just the same. Who's the "developing nation" now?

While there was a good amount of pessimism and explanations for recent financial shortfalls from many of the CEOs, Ken Powell, chairman and CEO of General Mills, talked glowingly of numerous new products pouring out of his company's R&D pipeline, including new cereals, dinner kits from Hamburger Helper and Old El Paso, and biscuits and bars.

He noted the recent groundbreaking on a yogurt factory in China and the success of its year-old Latin American acquisition, Yoki. "There's plenty of growth to be had," said Powell. "It's our job to go out and get it."

Batting second, ConAgra CEO Gary Rodkin described a company in transition that was nearing the end of a difficult fiscal year (ending in May).

Food Processing's 2013 Processor of the Year, ConAgra's, foodservice division faced two huge setbacks: the loss of a large distributor and a problem with the quality of its potato crop. Rodkin was reversing a strategy of finding new consumers for key brands, particularly Healthy Choice, Chef Boyardee and Orville Redenbacher products. "We tried but did not succeed," he said, so the new plan is to get core consumers of those brands to buy more. There also were "short-term operational challenges."

Even the private label business, which grew impressively during the recession and on which ConAgra has placed a very large bet with the acquisition of Ralcorp, experienced flat sales last year. And the integration of Ralcorp has not been without issues.

"We learned a lot of tough lessons this [fiscal] year," said Rodkin. "Still, we are in a better position than we were six months ago."

Officials from PepsiCo probably were preparing their typical CAGNY overview … then, on the morning of their presentation, investor Nelson Peltz released a letter renewing his call for a split of the company into a fast-growing snacks business and slower-growing beverage business. Perhaps in response, "Better together" was the theme of the talk by Brian Cornell, CEO of PepsiCo Americas Foods (Chairman/CEO Indra Nooyi was not scheduled to appear).

Cornell said the company's four priorities, in order, were brand-building, innovation, execution and productivity. He made no mention of a possible split or any references to Peltz, whose investment firm, Trian Fund Management, owns about $1.2 billion of PepsiCo stock.

Cornell did acknowledge a year-long review of the company's business with an eye toward improving financial results, which only confirmed the synergy between snacks and drinks. "Sixty-five percent of sales meet common, complementary needs. Thirty-five percent meet differing needs."

But, in Q&A, one of the analysts did bring up Peltz and his July 2013 "whitepaper," which recommended splitting PepsiCo and having the resulting snacks company buy Mondelez. Cornell, sounding only a little testy, indicated he would entertain only one such question, and answered: "We've looked at this from every single angle and we're absolutely convinced this is the right decision for the company." (See our Reporting: Memo to PepsiCo: Lose the beverages, keep the snacks and buy Mondelez)

Peltz, by the way, did buy his way into a seat on the Mondelez board of directors. His name didn't come up in the Mondelez presentation, but Chairman and CEO Irene Rosenfeld discussed the much-talked-about ascendance of snacking. "Snacking is a $1.2 trillion global market," she said, noting it's firmly entrenched in North America and other developed markets but is growing faster in developing markets.

She acknowledged, however, that snacking growth slowed in 2013 – most of her company's categories grew at 5 percent or less, compared to 6-7 percent growth rates in the two previous years. She also noted that Mondelez is saddled with older Kraft, General Foods and Nabisco domestic plants, which may be replaced with facilities in developing markets. Mondelez sales currently are 61 percent in developed markets and 39 percent in developing markets, but the latter is expected to grow.

Snacking is both a diversion between meals and a replacement for some traditional meals, she said. Mondelez-sponsored research indicates 60 percent of people snack as a treat ("to lift up my mood"), 25 percent consider it necessary fuel and food for the body, and 15 percent use it to boost or refresh their minds.

Kraft CEO Tony Vernon talked of "fewer, bigger innovations" and even a little "product line pruning," but promised a strong advertising budget to support Kraft brands. He said the biggest surprise in the company's scant 18 months of existence was "an unprecedented confluence of factors." He called them the "Three C's of Change":

  • Consumer – He attached numbers to the shrinking American middle class – Kraft's key demographic -- while both upper and lower income consumer groups are growing. Household sizes are changing, shrinking mostly, and Hispanics are a growing segment.
  • Customer/the retailer – While "traditional" channels, primarily grocery stores, see sales decline, newer formats such as dollar stores and mass merchandisers are up.
  • Communication – While holding its TV, radio and print advertising steady, new dollars have been assigned to digital and mobile channels.

Despite having 130-year-old roots, the new Kraft is only 18 months old, and "We are not yet firing on all cylinders," Vernon said.

Vernon and Campbell CEO Morrison must have shared notes. In addition to repeating the comment about the shrinking American middle class, Morrison also acknowledged the impact societal changes were having on Campbell's business – aging baby boomers, shrinking households, growth in Hispanics, changes in retailers, growth in digital marketing. But she added "the current acrimonious public dialog about food."

On the positive side, she heralded the "dynamic growth of packaged fresh foods." Campbell is pursuing that with its buy last year of Bolthouse Farms, which is enabling Campbell's growth in both produce and fruit and vegetable juices. She noted less of a dependence on soups, which were 40 percent of Campbell sales as recently as 2012, now down to one-third.

Hershey, like Kraft, is bullish on domestic growth. CEO J.P. Bilbrey noted Hershey's U.S. market share in chocolate has grown to 44 percent, aided no doubt by Brookside, acquired in 2012. Brookside already is a $200 million brand, and he predicted it would hit $500 million in sales soon.

Bilbrey also discussed the potential in China via its pending acquisition of Shanghai Golden Monkey. That and the launch of a new Hershey brand, Lancaster, in China will make that country Hershey's No. 2 market by 2017.

Kellogg "had a sustainable growth circle in the early 2000s," said CEO John Bryant, "but the recession, supply chain issues" and other problems have stalled the company. Project K, a global cost-cutting program announced last year, will attack those problems on four fronts: creating global category teams, building capabilities and driving efficiencies; building a "global supply chain of the future"; and implementing a global business services model.

Bryant did mention that the Pringles acquisition has worked out better than anyone expected – domestically but especially internationally. And he's encouraged by the growing interest in breakfast and protein.

Also buoyed by the interests in breakfast and protein is another relative newcomer, Hillshire Brands. Sean Connolly, president/CEO, unveiled a raft of new products, including breakfast products in the Jimmy Dean line and protein-heavy snack kits (meats, cheese and crackers) under the name Hillshire Snacking.

Hillshire also is taking Jimmy Dean outside of the breakfast category with frozen sandwiches (pulled pork, shredded beef, hickory smoked sausage and smoked turkey) expected to launch this summer and bowls aimed at lunch. Sales from new products were 9 percent when the company was Sara Lee, but they already are at 11 percent and will be 13-15 percent in 2015.

A true newcomer was WhiteWave Foods, spawned in 2013 when it was spun off from Dean Foods. Even as a Dean unit, its specialties were plant-based milks (Silk soymilk), coffee creamers (International Delight) and "premium," formerly organic, milks (Horizon Organic).

But 2014 acquisitions are taking WhiteWave into new territory. The purchase of Earthbound Farm brings the company into packaged, primarily organic, produce. And the pending joint venture with Mengniu Dairy takes it to China.

Horizon also is growing into new categories. Just last month, the unit launched boxed macaroni and cheese dinners, some of them organic and some "made with organic" (at least 70 percent of ingredients are organic). Cookies and snack crackers are on the way, promised Chairman and CEO Gregg Engles.

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