OAK BROOK, ILL. — The coming fiscal year marks the emergence of a TreeHouse “rededicated to our private label strategy and its manifest go-to-market opportunities,” said Sam K. president and chief executive officer, during a Feb. 21 conference call with financial analysts.
“After two years of prolonged inactivity, we anticipate 2013 will usher in another era in food and beverage consolidation, affecting both the glamorous global brands and their more homely private label counterparts,” Mr. Reed said. “No one can be better prepared or more capable in this circumstance as it relates to private label than our TreeHouse.”
Mr. Reed noted that as the “deal market opens,” TreeHouse expects “to lead the pack, as strategic acquirers and financial investors seek M&A-based expansion in the food sector.”
He said mid-size transactions of $100 million to $500 million, “the sweet spot of private-label consolidation,” should be particularly active “as earnings transparency improves and deal multiples return to their pre-recession norms.”
“As a strategic acquirer, our competitive advantages lie in our portfolio strategy, distribution infrastructure, management talent and access to capital,” Mr. Reed said. “Our strategy is the guide to those acquisitions, which lead us to the product categories, channels of distribution, and grocery or food service customers focused on growth and differentiation in private label. Our infrastructure provides the critical mass and economies of scale necessary to generate synergies while simultaneously serving a broad array of markets effectively.”
Looking more closely at the company’s North American Retail Grocery segment, where direct operating income increased 11% and total sales increased 13% during the fourth quarter ended Dec. 31, 2012, Dennis Riordan, senior vice-president and chief financial officer, said the company experienced sales gains in nearly every category, paced by double-digit increases in Mexican sauces, dressings, hot cereals, single-serve beverages, and pie fillings. TreeHouse even had a 9% increase in pickle sales over last year’s soft fourth quarter. The only really weak area, Mr. Riordan said, was soup, where TreeHouse had a decline in sales due to the previously announced loss of business at a key customer.
Elaborating on the weakness in soup, Mr. Reed said TreeHouse expects 2013 to be the year in which the company resets its strategy and investment in private label soup, gravy and broth.
“As we look at the whole of the category over an extended period of time, what one could see is the whole of the business of canned soup was steadily losing its aggregate volume,” Mr. Reed said. “And ostensibly a lot of that is related to consumer preferences and the way that the national brands have struggled for some time to be able to address those.”
He said TreeHouse reached the conclusion it needed to reduce its aggregate investment in the category, and closed one of its two plants.
Secondly, the company concluded that, given the national brand duality, it had created an infrastructure that was competing to provide a presence for all customers in all product categories segments that replicated the entirety of that business. That strategy is changing.
“What we are doing here in 2013 is not only reducing our investment in the whole of the business, but greatly simplifying our offering,” he said. “And trying to find that base of grocery customers that we can most profitably serve with, in effect, a single national brand equivalent in segments where there is sufficient volume and margin to allow us to begin to improve the business.”
An area that has performed well is the addition of new filtered coffee products, which partially was responsible for driving retail sales, Mr. Riordan said.
“We began shipments of this product at the very end of the third quarter and have been very happy with the sales of this new product,” he said. “As we’ve said from the beginning, this is an important category for us. And it has the potential to be a very good long-term driver of both sales and profits. However, we believe our measured approach is the best way to ensure the category remains a strong place for private label. Due to the early successes, we are already adding additional capacity to our coffee lines and using the current consumer resale trends to access even more capacity in the back half of the year.
“We are staying with our measured approach of building up to demand rather than trying to sell new capacity. And just to be clear, we also sell a variety of single-serve hot beverages besides the filtered coffee. These include hot cocoas, cappuccinos, cider and tea products. These unfiltered products are also doing extremely well and have increased approximately 92% compared to last year’s fourth quarter. This speaks to both the quality of the products and also the continuously increasing population of single-serve brewers.”
Mr. Reed also provided an update on TreeHouse’s efforts in dry dinners and powdered beverages. He said although the company was late to the game in the liquid beverage enhancer market, it has compensated for being late by offering what it believes is a better product than its competitors. That better product is one that is focused on two things: a package that “is far superior to the other private label packages out,” and coming up with varieties and flavors and combinations “that will distinguish us.”
In dry dinners, Mr. Reed pointed to two big headlines. First, the company has “greatly improved” its business during the course of the last year, including in microwavable cups and also skillet dinners. Second, the company’s focus has shifted to providing a strong private label brand to compete with Kraft Foods.
“We are, as you would expect, quickly on their heels with regard to how do we come out with flavors and formulations and packages that can appeal and give us the equivalent of that new brand out there in terms of its appeal at its convenience,” he said. “And there’s always a certain lag time to those. But I think we’ll see, in 2013, that our business will do quite well in that regard."