PARSIPPANY, N.J. — The key to winning at retail, according to the top executive at Pinnacle Foods Inc., is “game-changing” innovation. The Parsippany-based maker of Duncan Hines baking mixes and Birds Eye frozen vegetables has big plans for its pipeline.
“I think the most powerful thing to do is have great innovation,” said Bob Gamgort, chief executive officer, during an April 30 earnings call with analysts. “So if you go in with weak innovation or me-too innovation that’s not likely to grow the category, you’re likely to be paying more in slotting than you are if you’re going in there with something that is viewed as game-changing innovation.
“Bundling does help, because it’s very efficient for all parties involved, and one that’s likely to bring new users into the category. That’s viewed very differently.
“As we take a look at the center of the store and the top-line growth that you’ve all reported on, and our retail partners are really looking for innovation that changes the game, not just flavor addition. And so that’s all part of the conversation, when you’re thinking about what kind of investment you want to make and what kind of investment our retailers want to make when they’re viewing innovation.”
For the quarter ended March 29, Pinnacle Foods had net earnings of $41.5 million, or 36c per share on the common stock, up 2% from $40.7 million, or 35c per share, in the prior-year quarter. Excluding items affecting comparability, earnings increased 8.4% to $45.9 million, or 39c per share.
Net sales increased 3.3% to $665.3 million, which compared with $644 million the year before, reflecting a benefit from the November 2014 acquisition of the Gardein plant-based protein brand, higher net price realization and higher volume/mix, partially offset by unfavorable foreign currency translation. The earlier timing of Easter also contributed positively to results.
The company’s Duncan Hines brand lost share in the baking category after a competitor lowered prices by about 8% during the Easter season, Mr. Gamgort said. A combination of aggressive promotional activity and a lack of innovation is dragging down the category, he added.
“We saw this in the fourth quarter, where we did play a very aggressive pricing game,” he said. “And we really were able to gain share and grow consumption, driven by premiumization and innovation, although we saw a lot of price competition in the fourth quarter that dragged the category down. The exact same thing has happened in the Easter time frame. As I mentioned, the leader in the category dropped their price by about 8%. So if you’re not going to getting an elasticity impact on that on units, by definition, it's going to drag the category down. And that’s exactly what happened.”
Mr. Gamgort said Pinnacle is having lots of conversations with its retailers, presenting data that show this is not a winning strategy, especially during the holiday season where baking is not an impulse item.
“We really believe that the keys to driving this category are making sure that we’re offering premium products and tiered pricing, because there is a baker out there that is looking for higher quality items and is willing to pay what is actually a fairly small premium in terms of cents,” he said. “You’re talking about 25c, 50c up to $1 more, but a substantial per cent increase versus what’s happening right now. They’re willing to pay for that on premium product.”
A second part of the equation is innovation, which Mr. Gamgort said has been lacking in the baking category. He said the company’s Decadent line has been one of the most innovative lines in the baking mix category and has been gaining share steadily at a premium price. More innovation is on tap for the second half, including products that are focused on changing demographics.
“What you’re seeing is that baby boomers, for example, who are heavy bakers in general, as well as on the opposite extreme, younger households are also very interested baking, they have a tough time baking for two people, because the quantities are too large,” he said. “And so we’ve got some innovation that’s targeted solving that need. And I think that’s going to bring people back into the category.
“So … we’re going to stay the course on this one. Because we know that we’ve got the right strategy to drive our business, as well as the category, and we aren’t going to get distracted by some of these short-term price issues.”
Net sales for the Duncan Hines Grocery segment fell 1.4% to $261.2 million, as a result of lower/volume mix of 1.2% and unfavorable foreign currency translation of 0.7%, partially offset by higher net price realization of 0.5%. Brands leading sales growth included Duncan Hines baking products, Log Cabin and Mrs. Butterworth’s syrups and Vlasic pickles.
Earnings before interest and taxes (EBIT) for the segment grew 1.3% to $43.2 million, reflecting productivity savings, favorable product mix and lower marketing spend that partially offset impacts of net sales decline and input cost inflation.“Our ambition is to drive category growth through innovation and through premiumization of our products,” Mr. Gamgort said. “And it’s not surprising when there’s a lot of share loss that somebody might react in a short term by dropping their price. But there’s a limit as far as we will go in terms of dropping our price, because it’s not only not good for our brand and our profitability; it’s not good for the retailers, either.”