ConAgra's private brands profitability disappoints
by Monica Watrous
OMAHA – When ConAgra Foods, Inc. acquired Ralcorp Holdings early last year, it also acquired a host of customer service issues that led to lost business. But the company remains confident in its long-term private brands strategy, even as segment profitability missed the mark in the most recent quarter.
“Clearly, we are not happy and satisfied with our overall results in this business,” said Gary Rodkin, chief executive officer, on March 20 during a conference call with financial analysts. “But importantly, we need to remember this is a long-term play. Private brands, for all the reasons we've talked about, we believe will absolutely be a long-term growth vector in the industry, and long term we are advantaged, scale, breadth, capabilities, none of these advantages have thus far come into play. Not yet.”
In the company’s third quarter, sales of private brands jumped 149%, but profit fell below plan on sales force and supply chain transition issues. Additionally, competition in the marketplace prompted ConAgra to make deliberate pricing concessions to protect volumes, which subsequently challenged margins.
Representing 24% of ConAgra’s net sales, the private brands segment participates in 30 categories at retail, from cereal and snacks to refrigerated and in-store bakery products. The complexity of the business has caused a number of integration headaches for ConAgra, which said manufacturing network adjustments, most significantly several plant consolidations that were under way prior to the acquisition, were poorly executed, leaving orders unfulfilled, which meant lost business in some cases.
Since then, ConAgra said it has made progress in its integrating processes and systems to restore order fulfillment and regain customer trust.
“There's no question this has been a period of fighting fires while working to establish a solid foundation with the right structure and focus,” Mr. Rodkin said. “We continue to get positive feedback on the strategy and our opportunities from customers.”
For example, he said, with one major customer ConAgra increased private brands sales by more than $20 million since the acquisition, by gaining business in snacks and cereal. With another customer, the company recently added business in three categories previously served by its competition, and ConAgra said the customer has noted its own commitment to double-digit growth in private brands.
“And while we expect that the marketplace for private brands will continue to be very competitive, just as it is for everyone in the food business, we are confident that our model of offering scale and C.P.G. capabilities in branded and private brands is a differentiated and winning proposition long term,” Mr. Rodkin said.
With dedicated leadership and an integrated sales team in place, the company said it expects to see margin improvements in private brands beginning next year.
“This is a transformation, and, frankly, it is a lot more complex than just a normal integration because of that,” Mr. Rodkin said. “The long-term strategy is sound.”