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ConAgra First to Feel Effect of Ugly Food Sales Data

Posted
9/30/2013 12:58:00 PM
By: Minyanville
Referenced Stocks:CAG;GIS;K

Nielsen market share data for August 31 probably looked no different than normal to most people. But I took note of declines in frozen dinners, peanut butter, canned pasta, and popcorn. It was not particularly because ConAgra ( CAG ), which is a big player in these categories, had announced disappointing results the day before. It was more because total private label food sales increased 2.7% in the four weeks ended August 31, combined with units being down 2.5%. So private label prices were up, which they have been for a few quarters relative to branded food.

Yet here is ConAgra with pasta (Chef Boyardee), popcorn, and peanut butter, three inexpensive foods, priced at relatively low premiums to private label, taking it on the chin during a period when its relative price gap is narrowing versus private label. Frozen dinners, while not cheap food, and while not losing out to private label alternatives I believe, were losing out in distribution points and mostly in the lowest priced brands as only Healthy Choice Steamers were strong.

Then I read that one analyst's analysis of Nielsen data concludes that food price promotions are becoming less effective at driving sales for packaged food companies, having declined for 20 consecutive months. Not surprisingly ConAgra's promotions have been some of the most ineffective.

This is an ugly, though not unexpected, development. It means that some consumers have become so squeezed financially that they have had to get smart enough to look at the real price differentials in food and not react to shorter-term changes in relative percentage price differentials. ConAgra, which has weaker brands than other food companies, should be the first to feel this, but it will likely be a trend that hurts others. The result can logically only be overall price reductions.

Right now, a number of companies are seemingly in the bargain bin after an investor rush for dividend yield earlier this year. ConAgra at $30 discounts zero EPS growth in perpetuity, but one would need a definitive Ralcorp (NYSE:RAH) acquisition opinion to buy. Kellogg ( K ) discounts a 3% five-year growth rate at its present $60 price, but it is in a declining gross margin trend while not selling much cereal, another cheap food that is not growing much for branded players. General Mills' ( GIS ) stock at its $48 price discounts only 3% long-term EPS growth.

Most other food companies are still more highly priced, but I think that this consumer pressure will spread to most of them.