OMAHA — After a disappointing start to fiscal 2014, ConAgra Foods, Inc. is in course-correct mode.
“I am the first to admit and take accountability for the fact that we had a bad quarter,” said Gary Rodkin, chief executive officer, during a Sept. 19 earnings call with financial analysts. “We’re not just hoping things are going to get better. We’re taking actions. … We’re going to do it right, and that’s why we’re going to see most impact in the second half.”
Poor volume performance in the company’s Consumer Foods segment led to a 42% drop in income during the quarter, as competitors in key categories of frozen foods and canned pastas yanked away share with ramped-up merchandising. To stabilize the segment, ConAgra is shifting dollars from advertising to merchandising, which historically has helped the company lift volumes. But, Mr. Rodkin said, it’s not an ideal solution for long-term brand health, and the company is “not expecting heroics.”
“We had been on a path of increasing our marketing dollars over the last several years, but this environment calls for some course correction toward more in-store merchandising, and we’ve begun the process on a category-by-category, customer-by-customer basis and most importantly, within financially responsible guidelines,” Mr. Rodkin said.
Recent launches, including Bertolli premium meals and desserts and Marie Callender’s single-serve cakes performed well, but the company said it miscalculated the price value equation for a few new products, such as Marie Callender’s breakfast sandwiches and Orville Redenbacher’s Pop Crunch.
However, the real pinch came from heightened competitive activity in both frozen foods and the Chef Boyardee brand.
“As you know, we lead in the canned pasta category, but we really compete in a broader shelf-stable, convenient meal arena,” said Tom McGough, president of the Consumer Foods division. “The reality in Q1 was that we saw a much stronger promotional activity, particularly at the back-to-school period, in that broader category.”
As for the cooled-off frozen meal market, a consumer migration to fresh alternatives on the store’s perimeter may be to blame, the company said.
“In our largest category, in frozen, we’ve been winning market share, as you know, over a number of years, within this large category,” Mr. Rodkin said. “A lot of that’s been driven by really strong innovation, marketing, etc., but we can tell you that the intensity of the merchandising really ramped up some pieces of some segments of that frozen category. … We had been trying to stay on a patch of driving toward more pull, but frankly, given the fact that we’ve won a lot of market share in several of these segments, we’ve seen competitors really dial it up this summer. We’ve got to do what we need to do to win back that market share, and it’s really not a return in hoping for an immediate return to rationality. It’s really, in the near-term, a return to our fair share of merchandising.”
As a result of these efforts, ConAgra said it expects the Consumer Foods division to post flat volume performance and low single-digit growth for the full year.
“Price value is more important than ever before, and we need to get back our share of quality merchandising and our market share,” Mr. Rodkin said. “This environment’s requiring us to be more cost conscious across the whole company so that we can deliver that value. This includes raising the bar and being more selective on where we spend our resources, including our marketing dollars.”
Or, perhaps, shedding businesses. Earlier this month, the company announced the divesture of its Lightlife brand of meat alternatives to a private equity firm.
“Lightlife, frankly, we did not have enough focus on that particular segment,” Mr. Rodkin said. “It was our only real entry into that part of the store and we just couldn’t provide the kind of focus on it. It’s a nice business, a good equity, but better focus from a different company will help that business.”
For its Commercial Foods segment, ConAgra predicted a decrease in operating profit, driven by the negative effect of losing a major food service customer from its Lamb Weston potatoes business as well as the impact from its Ardent Mills transaction with Cargill and CHS, Inc.
“…we’ve got a strong commercial business led by Lamb Weston,” Mr. Rodkin said. “Yes, we did have and do have a short-term bump with a key customer, but this is a big-scale, high-market share, global-footprint business that will continue to grow and deliver us strong returns.”
Additionally, ConAgra lowered expectations for its Ralcorp business as it continues working to integrate and restructure the newly acquired division, but the company sees eventual payoff in its private-brand strategy.“We’re working hard to get ourselves in position to really drive that growth by leveraging our new operating organization, scale, and our C.P.G. capabilities,” Mr. Rodkin said. “It's taking some time to rebuild and rewire this organization, but it's coming together well and we can, as I said before, see a light at the end of the tunnel.”