Smucker burned by coffee declines

by Monica Watrous
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Smucker's coffee volume declined 18% during the second quarter.

 

ORRVILLE, OHIO — Consumers bought fewer cans of Folgers coffee after the J.M. Smucker Co. raised prices to offset higher costs. The company reported a 5% decline in net sales during its second quarter, driven by an 18% drop in volume for its U.S. retail coffee business as shoppers delayed purchases of traditional ground coffee or switched to private label products. Along with higher prices, reduced promotional effectiveness and ongoing competitive activity contributed to the decline in ground coffee — not growth in the premium and single-serve segment, the company noted.

“Our teams have spent a great deal of time analyzing the recent results, allowing us to conclude that this performance does not reflect a fundamental change in the coffee category,” said Richard Smucker, chief executive officer, during a Nov. 19 conference call with financial analysts to discuss second-quarter performance. “We do recognize the need to continuously create value for consumers and have adjusted our tactics to address the current dynamics in the marketplace.”

With the current higher pricing, traditional ground coffee costs 5c more per cup, but Mr. Smucker said the mainstream segment continues to provide a strong value proposition for consumers.

“We believe mainstream roast and ground coffee will continue to be very relevant to consumers as the largest segment in terms of volume within the category,” Mr. Smucker said. “Prior to this quarter, volume for the Folgers brand has grown in eight of the past nine quarters. Over this time, Folgers has also gained dollar share in the mainstream segment and remains the dominant brand in this space. We also see opportunities to innovate within the mainstream segment beyond new roast and flavors to provide consumers additional convenience options and grow our roast and ground share.”

In premium and single-serve coffee, Mr. Smucker said the company is well-positioned to participate in the segment’s growth with its Dunkin’ Donuts brand.

“We have grown this brand consistently over the years, including volume gains in 8 of the past 10 quarters, increasing Dunkin’ Donuts market share in the premium segment over this time,” Mr. Smucker said. “Within K-Cups, our growth rates have slowed since we first entered the segment, yet recently we have seen significant gains for our Folgers K-Cup and the initial contributions from our recently launched Cafe Bustelo K-cups. We remain confident that our brands will continue to play a key role in the growth of this platform.”

Also inspiring confidence are previous instances of Smucker’s ability to grow profits amid periods of higher green coffee costs. The company said it expects trends to improve in the long term but has lowered its full-year forecast with a projected decrease in net sales of approximately 1%.

“While we expect these challenges to persist in the near term, we are optimistic as we look ahead due to several factors,” said Vince Byrd, president and chief operating officer. “We are beginning to see competitive price gaps narrow. We anticipate the market will ultimately adjust to higher prices. Our price-to-cost relationship for everyday shelf pricing is consistent with historical norms. We are tactically adjusting all of our levers, including price. And as previously stated, our research indicates the recent declines were not driven by fundamental shift to single-serve coffee.”

Elsewhere in Smucker’s portfolio, Jif peanut butter, Uncrustables frozen sandwiches and Crisco oils posted volume gains during the quarter. Net income for the second quarter ended Oct. 31 slipped 3% to $155.4 million, equal to $1.53 per share excluding certain items, which compared with $160.5 million in the prior-year period. Net sales dropped to $1,481.8 million from $1,559.9 million in the comparable quarter.

“To address the challenges and take advantage of the opportunities, we continue to focus on innovation with an increased emphasis on products that are consistent with evolving consumer trends,” Mr. Smucker said. “We are also accelerating our commitment to those areas of our business that provide the biggest opportunities for future growth, ensuring that our resources are aligned properly. At the same time, we are continuing to review all of our cost levers throughout our organization.”
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