The storied packaged food manufacturers such as General Mills (GIS), Campbell's Soup (CPB) and Hershey (HSY). For what seems like the past three years, organic names Hain Celestial (HAIN) and others that have been acquired have been all the rage amongst investors. Major retailers Wal-Mart (WMT) and Target (TGT) have reduced shelf space for sugary and fatty packaged and canned foods with weird-sounding ingredients. In their place are organics promising some form of healthier life.
Now, in the thick of earnings season for packaged goods, one thing is becoming clear: the big boys are finally getting it.
Not everyone is getting it. Kellogg's (K) is really falling behind the industry's pace of change and I am not sure Coca-Cola (KO) is moving quickly enough (although the company's second quarter was solid and much tighter than the first). And the market is beginning to take notice as shares of Campbell's and General Mills have put in nice showings year to date. In its infinite wisdom, the market is wagering today that investments being made in food makeovers will yield earnings reacceleration over the next five years. Looked at another way, the market sees the old guys in the packaged food space returning to some form of glory before the year 2020, while at the same time using their balance sheets and operational discipline to make accretive acquisitions in the organic sector. They may overpay, but at least they will gain access to the lucrative perimeter of grocery stores.
Further, if I were Warren Buffett, I would be considering today as the opportune moment to strike in consolidating his position in the sector. You want to buy when earnings are still depressed.
Here are several trends I am seeing in my talks with execs.
Two weeks ago I talked at length with the CEO of General Mills, a company that is overhauling its cereal business. This summer the company will unveil new gluten-free Cheerios and later in the year Lucky Charms. Organic soups from Annie's are hitting the shelves. Other work is underway to make the product portfolio more in keeping with consumer trends for health.
Campbell Soup surprised me with what they shared yesterday, very thorough work underway to reformulate tons of product lines by 2018. The focus is on removing perceived harmful ingredients and increasing food transparency online. I also like the depth of the company's restructuring plan and push into organic kids' food (which will compete with offerings from Hain). Results are likely to be challenged in the near term, but there is light at the end of the tunnel for the storied soup maker.
On the flip side, Coca-Cola Chairman and CEO Muhtar Kent told me yesterday in response to a question on product reformulations that they are "not the Holy Grail." The comment has me concerned that Coca-Cola is not going to move fast enough over the next five years to add health to key products like trademark Coke and Diet Coke. Yes, dare I say, that regular Coca-Cola needs a healthy reformulation in this changing environment in the U.S.? Talk about risky. But I do believe Diet Coke goes aspartame free within the next 12 months, which could prove to be a good boost to Coca-Cola's U.S. business (the company holds the No. 1 position in the diet cola sector).
Personally, I think shopping in retail supercenters and grocery store packaged food sections has seen little change in the past five years. Aisles still look the same, with the major brands mostly in the same position on the shelves. But you will notice changes within the next two years as packaged food companies seek to make consumers aware of their new product innovations. For starters, the product packaging will get massive redesigns to capture your attention and you will see clear labeling on ingredients that have been removed. The shape of the packaging will be sleeker and will use better colors (earth tones) all in a bid to connect with more discerning consumers. Those companies that are doing this will gain shelf space for the new products (Campbell's tells me that they already have).
Also, expect a good deal of signage in these stores that promote the health attributes of the new products. Major retailers are totally on board with what the old packaged food guys are doing and want to invest alongside them. Doing so gives them a chance to boost sales in categories that have been laggard performers for years, such as soup and baking products.x