Can B&G Foods reheat Cream of Wheat?

by Monica Watrous
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B&G's recent Cream of Wheat introductions, including Cinnabon and chocolate varieties, failed to resonate with hot cereal consumers.

PARSIPPANY, N.J. — In the hot cereal category, Cream of Wheat has cooled.

Executives of B&G Foods, Inc. admit mistakes with the brand, which declined nearly 9% in the first quarter following a price increase. Still, the company reported net income for the period ended April 4 of $19.6 million, or 36c per share on the common stock, up 10% from $17.8 million, or 33c per share, in the year-ago period. Net sales advanced nearly 10% to $217.1 million from $198.1 million the year before.

While a price hike of about 2% across half of B&G’s product lines at the beginning of the year was generally accepted by consumers and helped improve revenue for such brands as Ortega and Pirate’s Booty, Cream of Wheat did not fare as well.

“In 2014, we ran aggressive promotions on Cream of Wheat that increased volume but reduced profits,” said Robert Cantwell, president and chief executive officer of B&G Foods, during an April 23 earnings call with financial analysts. “We pulled back on those deals in 2015 and saw positive pricing of approximately $700,000 and negative volume of $2.3 million.”

The company expects to stabilize the brand with adjustments to promotional plans and new product launches. But executives also acknowledged hot cereal is a struggle for B&G Foods.

“We certainly have lagged the category in Cream of Wheat,” said Tom Crimmins, chief financial officer. “Some of it is how we have increased pricing that has affected that. That has been a difficult category for us. We’re trying to fix that.”

Recent introductions, including Cinnabon and chocolate varieties, failed to resonate with hot cereal consumers. B&G Foods hopes its newest launch of instant Cream of Wheat cups will lure more shoppers, including millennials, to the brand.

“We’re hoping it can be a real driver here,” Mr. Crimmins said. “I think the product put-ups we tried before, such as Cinnabon and chocolate, was more of a sugar put-up, and… the Cream of Wheat consumer didn’t want that sugar cereal. At the end of the day, this is more Cream of Wheat in a cup, and this is really trying to get the users who use Cream of Wheat, and hopefully more users, but to be willing to use it as an instant product, take it to work potentially, have a little breakfast at work. Use it that way and create more usage for the existing consumer and hopefully add younger, the millennials, into this Cream of Wheat franchise because it’s more of an on-the-go product.

“It’s less about adding a lot more sugar to a product that really didn’t hit home with the Cream of Wheat consumer before. It’s more about the convenience of selling them what they want to buy.”

Elsewhere in B&G Foods’ portfolio, other brands performed better. Specialty Brands, acquired in April 2014, contributed $22 million to the overall increase, led by Bear Creek dry soup mixes.

“We have owned the Bear Creek brand for almost one year and have come to appreciate the strength of the brand in the dry soup subcategory,” Mr. Cantwell said. “In the late summer we will be launching four flavors of Bear Creek hearty soup bowls, which are a new alternative for consumers who are looking for an easy, on-the-go single-serve option. We also see additional opportunities to expand distribution of the brand’s core dry soup items.”

First-quarter results were negatively affected by the Rickland Orchards brand, which saw a decrease in net sales of $7.6 million compared to the prior-year quarter. Comparable base business net sales, which excludes the Rickland Orchards shortfall, increased $4.5 million, or 2.4%, due to gains in net pricing and unit volume.

“Net sales increased by 14.4% for Ortega, 13.1% for Pirate’s Brands and 8.8% for Maple Grove, offset by a net sales decrease of 33.9% for New York Style, 8.5% for Cream of Wheat, and 18.8% for TrueNorth,” Mr. Crimmins said. “All other brands in the aggregate increased 0.7%.”

Gross profit for the quarter increased 4.2% to $67.4 million, which was pressured by customer refunds associated with a November 2014 recall of Ortega and Las Palmas products.

“The Ortega and Las Palmas recall is now behind us with no apparent long-term adverse effect on the brands,” Mr. Cantwell said. “Sales of both products are performing better than before the recall. I am very proud of how the organization handled the recall and how quickly they were able to get the products back in distribution with minimal customer issues.”

For the year ahead, B&G Foods’ executives continue to expect adjusted diluted earnings per share of $1.48 to $1.55 and net sales of $860 million to $880 million. In 2014, the company had full-year net income of $41 million, equal to 76c per share on the common stock, and net sales of $848 million.

“We are undertaking new initiatives to improve our distribution systems, we continue to be focused on developing new products that will be margin accretive and we are actively working to reposition our existing brands and products for improved performance,” Mr. Cantwell said. “In addition, our organization is poised and ready to continue our strategy of declaring center-of-the-store grocery and snack brands if and when the right opportunities present themselves. We have a lot of good news as we head through 2015 and I feel very confident about our future in achieving our full-year guidance for 2015.”

Shares were up more than 8% in mid-morning trading on April 24 following the previous close of $29.75.
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