Shifting Duncan Hines above the fray paying for Pinnacle Foods

by Keith Nunes
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Five years ago, Pinnacle’s management team chose to pivot the company’s Duncan Hines business away from the low end of the category and focus on developing such premium offerings.
 

 

PARSIPPANY, N.J. — On the surface it may appear as if Pinnacle Foods’ Duncan Hines Grocery unit posted a disappointing performance during the first quarter of fiscal 2016. But the sales trends, according to company executives, may be deceiving.

The business unit includes such brands as Duncan Hines, Vlasic pickles and Wish-Bone dressings, and sales during the first quarter of fiscal 2016, ended March 27, fell 6.9% to $243.2 million compared with the year-ago period. Business unit earnings before interest and taxes declined 1.4% to $42.6 million.

“… On Duncan Hines, most of this is driven by a mix shift away from the low end, which has a lot of volume, to the premium end,” said Bob Gamgort, chief executive officer, during an April 28 conference call with financial analysts. “ … We had a 21% consumption increase in premium and we had a pretty significant decline in the low end. Let’s be clear, we could fix the decline in the low end, if we chose to, by dropping price to match competition; but from a profit standpoint, it’s a really bad decision.”

Five years ago, Pinnacle’s management team chose to pivot the company’s Duncan Hines business away from the low end of the category and focus on developing such premium offerings as Perfect Size portion-controlled products as well as mixes and products with such premium positioning as decadent and indulgent.

“…What we’ve been able to show is that we’ve been able to go for the higher profit segment of this category and reinvent that section,” Mr. Gamgort said. “And again, 21% consumption on premium is really strong in a category that had significant declines overall. So it speaks to the consumer wanting a better experience in baking.”

Mr. Gamgort added that Pinnacle is paying less attention to the “low end” of the baking category, because of the “dysfunctional pricing that has drained a lot of profitability out of that segment, not only for the manufacturer, but for the retailers. And most of the retailers now view that, reluctantly, as a loss leader. After all of us have been doing this for a long time, those are not categories you want to spend much time thinking about.”

For the first quarter of fiscal 2016, Pinnacle Foods’ net income fell to $24,836,000, equal to 21c per share on the common stock, compared with net income of $41,536,000, or 36c per share, during the first quarter of fiscal 2015.

Duncan Hines Perfect Size heart-shaped cakes for Valentine's Day, Pinnacle Foods
Duncan Hines Perfect Size baking mixes were developed to appeal to smaller households.

 

Sales rose to $754,255,000 during the quarter compared with the same period of 2015 when sales were $665,281,000.

Craig Steeneck, chief financial officer, attributed the sales increase to the inclusion of sales from Boulder Brands, which was acquired by Pinnacle Foods in November 2015. Costs associated with the acquisition took a toll on first-quarter net income.

Excluding items affecting comparability, the company said net income increased 3.3% to $47.4 million compared with $45.9 million the year prior.

Looking ahead, Mr. Gamgort said he sees several avenues for growth, particularly in frozen foods.

“… If you look at, for example, Birds Eyes veg consumption in the quarter was plus 12%,” he said. “Birds Eye Voila consumption plus 5%; Gardein plus 30% and we are capacity-constrained (in the Gardein business). And so we are holding that business back. This tells you that you can have more than just incremental growth in frozen; you can have explosive growth in frozen if you get in sync with consumer trend.

“So our strategy is to continue to do exactly what we are doing. But, as we talked about, we want to evolve or pivot our portfolio more towards health and wellness over time. And that’s not by any means changing our strategy. It really is evolving to say we know when brands are in line with consumer trends; they grow faster. So why don’t we give ourselves a better position there?”

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