Prices, Emerging Markets Dominate CAGNY Talk

March 11, 2011
Food executives made their annual presentations to the Consumer Analyst Group of New York.

Rising commodity prices and the potential of emerging markets seemed to be the preoccupations of food & beverage company executives speaking at the annual Consumer Analyst Group of New York (CAGNY) meeting in February. Twenty-eight consumer goods companies discussed their plans and outlooks for this year and beyond with Wall Street analysts.

"In North America alone, we expect commodity costs to up $700-800 million this year," said Tony Vernon, president of Kraft Foods North America, "About half our sales of cheese and dairy, meat and coffee categories will be hit especially hard." And he noted that "retailers are competing for shoppers on the basis of price like never before."

The answer for processors: Higher prices.

"We took a wait-and-see attitude during most of 2010 about pricing to see what would happen with grains. Well, things got worse and wait-and-see went away at the end of the fourth quarter," said Hormel Foods Chairman/CEO Jeffery Ettinger. "For grocery products, we've announced two different waves of price increases."

However, he said the price increases would not come at the cost of growing the business.

Hormel announced record first quarter results the same day its officers spoke to the analysts. Despite year-over-year sales gains in all five of its business segments, Jody Feragen, Hormel's executive vice president and CFO, voiced concern over higher input costs. She said the company is expecting hog prices to increase 15-20 percent this year and grain prices to rise some 45-50 percent. Despite cost savings initiatives across the company, the price increases were necessary.

"Competitive and category discounting has certainly been a factor, and we believe that rationality will return to most categories," said ConAgra Gary Rodkin. But "inflation is very real. For the balance of fiscal 2011 we expect inflation for our consumer foods business to remain relatively high, above 5 percent. We are seeing inflation across a number of categories, including grains, proteins, edible oils, packaging and energy."

ConAgra's CFO estimated inflation "to be in the range of 7 percent" for the company's fiscal 2012, which will begin on June 1.

While much of Sara Lee's presentation was about the impending split of the company into two units, CFO Mark Garvey said Sara Lee expects price increases to offset higher commodity costs and return the company to growth in the second half of fiscal 2011 (which ends in June).

There are, of course, strategies in place to combat even uncontrollable commodity prices. David Brearton, Kraft's executive vice president of operations, said savings from systems, manufacturing, procurement, logistics and overheads should offset higher input costs and fund additional brand-building investments and new product development. He said that, since 2008, procurement and logistics savings have more than doubled, while Lean Six Sigma is stepping up manufacturing savings.

PepsiCo CFO Hugh Johnston talked of "a new capability we are developing … managing a world of higher commodity volatility." He noted commodities make up about 30 percent of PepsiCo sales, "and our commodities basket is pretty well diversified across different agro inputs, ingredients, sweeteners, packaging and, of course, energy."

He spoke of hedging, as all the CFOs did. But, "only about 70 to 80 percent of our commodities costs are hedge-able right now, but that percentage is always increasing."

Emerging markets
On the positive side, most executives talked enthusiastically about the growth potential in emerging markets.

PepsiCo Chairman/CEO Indra Nooyi talked of a "portfolio transformation that we started five years ago. We have dramatically increased our international exposure and we have become a lot more global. Between 2000 and 2010, our international mix increased by 14 points. Over the past five years alone, our emerging market exposure has increased by 10 points, moving from 21 percent to 31 percent."

Similar talk came from Kraft Chairman/CEO Irene Rosenfeld. Noting the acquisition of Cadbury, she said, "Nearly 60 percent of our revenues are generated outside of the United States. And we've doubled our presence in fast-growing, higher-margin instant consumption channels. As a result, we're now on a new growth trajectory."

Hershey said it is on track to reach $1 billion of international net sales growth by 2015.

"Appealing to consumers in developed markets is crucial, yet one growth opportunity stands above all – emerging markets," said William Johnson, Heinz chairman and president/CEO. "Heinz is well-positioned in emerging markets, whose combined revenues, I believe, will eclipse our largest segment, North American Consumer Products, by 2015."

His comments were echoed by General Mills Chairman/CEO Ken Powell: "Emerging markets represent the future for ready-to-eat cereal growth as the number of middle-class consumers increases."

Even Hormel, normally a company dedicated to organic growth, talked of international acquisitions, particularly in Asia. "We have the cash and debt capacity to pay for acquisitions, and we would consider an acquisition in Asia if the right deal comes along at the right time and at the right price," said Ettinger.

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