Organic and soy milk seller WhiteWave Foods Co, privately owned
yogurt maker Chobani Greek and Keurig coffee brewer seller Green
Mountain Coffee Roasters Inc have shaken up their categories and
chalked up enviable growth while big companies such as ConAgra Foods
Inc, Danone S.A. and General Mills Inc struggle.
Shares of the companies that make everything from Cheerios and
Pepsi-Cola to Pampers disposable diapers have been a defensive play
for investors in uncertain times. But the companies have been
struggling with weak demand in North America and Europe, cooling
emerging markets and increasingly fickle consumers empowered by
social media and online search and comparison tools.
Investors flocked to packaged food stocks last year, hoping to
benefit from dividend increases and potential takeovers following
the purchase of H.J. Heinz. Now they have begun to trade out, making
consumer staples the worst-performing sector over the past six
Analysts warn their shares could sink further.
During the last five years, the Standard & Poor's 1200 Consumer
Staples index had a total return of 117 percent, ranking sixth out
of the 10 sectors measured. Over the past six months its return has
been the worst of the 10, down 0.55 percent.
"You're going back to the fundamentals now, which really are pretty
abysmal," said Wells Fargo food analyst John Baumgartner. He and
others said there may be room for further declines. "The stocks
still aren't cheap."
Helped by predictable, strong cash flow and generous dividends, the
25 biggest consumer staples firms still trade at 18 times forward
earnings estimates, according to Thomson Reuters data. That's not
far from the 20 multiple enjoyed by the fast-growing technology
Big names including Nestle S.A., Unilever PLC and Procter & Gamble
Co all have shed under-performing food brands, including PowerBar,
Skippy peanut butter and Pringles, respectively. But for most
companies in the space, perennial efforts to remake themselves
through acquisitions, divestitures or new product development have
not moved the needle dramatically.
Several executives presenting at this week's Consumer Analyst Group
of New York (CAGNY) conference in Boca Raton, Florida, served up
familiar strategies that bolster short-term profits without boosting
sales. Investors at the conference have been pressing for bolder
steps like divestitures of underperforming units and purchases of
smaller, faster-growing rivals.
"A big theme here is companies going back to their core. But is the
core still relevant?" asked Andrew Cosgrove, lead analyst on Ernst &
Young's global consumer team. "The world has moved on."
Cadbury chocolate and Oreo cookie maker Mondelez International Inc,
grappling with skimpy returns since its split from Kraft, outlined a
plan to boost margins after billionaire activist investor Nelson
Peltz joined its board and a new activist investor, Jana Partners,
announced a stake.
CEO Irene Rosenfeld said her strategy included adopting the same
stringent budgeting style favored by the Brazilian owners of Heinz,
who are notorious for their cost-cutting.
Procter & Gamble, maker of Tide and Pampers, laid out plans to
restructure operations and redesign its North America supply chain
to save money.
"Everyone's talking about the same thing. There seems to be an even
greater focus than usual on productivity and cost-savings," said
Kevin Dreyer, a portfolio manager at Gabelli Funds LLC.
CAN THE CENTER HOLD?
Though Peltz did not attend the conference in the balmy beach town
of Boca Raton, he stole the show with a renewed call for PepsiCo to
separate its lackluster beverage business and its flourishing snacks
division into "two leaner and more entrepreneurial companies."
[to top of second column]
PepsiCo executives stuck by their view that the two businesses are
To that same end, Kellogg Co said its No. 1 priority in 2014 is
to revive growth in its mainstay cereal business that has lost
ground to frozen breakfast sandwiches, Greek yogurt and smoothies.
That double-down follows its own forays into other breakfast
categories like protein bars and shakes.
"When we talk about winning in breakfast it doesn't mean we're going
to go into frozen bagels or orange juice or coffee, we're going to
win in breakfast with cereal," Kellogg Chief Executive John Bryant
Analysts and investors pressed executives to explain why doing much
of the same thing would yield different enough results to justify
the sector's premium valuation.
In one pointed exchange, Deutsche Bank analyst Eric Katzman
questioned Campbell Soup's plan to expand its premium soup business.
"I think I have heard Campbell Soup talk about premium soup
probably, I don't know, 10 different launches. Every single one has
failed. So why is this move going to be successful?"
Campbell CEO Denise Morrison told Katzman that premium soup is a
relatively new segment. The company now sells a range of fresh,
organic and ethnic-influenced soups in different packages in
addition to its iconic red and white cans.
In an interview with Reuters, she added, "we believe we're building
a very robust platform for the next generation of consumers that
will be meaningful."
Coca-Cola Co announced another dividend increase and a cost-savings
funded $400 million incremental increase to its marketing arsenal
after 2013 sales fell short of internal targets.
Some analysts said Coke's need to significantly increase spending to
hit its goal underscores the lackluster growth in the sector,
dominated by behemoths with annual sales that exceed the gross
domestic product of many small nations.
The world's biggest soft drink maker recently invested $1.25 billion
in Green Mountain and signed a deal to sell Coke-owned beverages on
the smaller company's upcoming at-home cold drink machine. Several
analysts said they would like to see Coke buy Green Mountain
outright, which would diversify Coke away from sugary sodas that are
struggling in key North American markets.
On the other hand, Dean Foods Co spin-out WhiteWave is aggressively
expanding its portfolio, introducing "milks" made from almonds,
coconut and oats, as well as new organic snacks that address
consumers' growing appetite for products they deem "cleaner" and
Gregg Engles, WhiteWave's CEO, cautioned that business as usual
could be a burden for big consumer companies when consumer tastes
and demographics are rapidly shifting.
"In this industry as in many other industries, often changes can be
abrupt and disruptive," he said.
(Reporting by Lisa Baertlein and
Martinne Geller in Boca Raton, Florida)
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