Tuesday, December 22, 2009

Comments on Some News from Today

One of the topics I discuss on this blog is what I view as a permanent shift in US consumer preferences towards value/private label. There are several reasons for it, global wage arbitrage suppressing the living standards over the last 20-30 years, more recently, high unemployment, retailer consolidations, and others.

I have written about the private label growth in food several times: most recently here (discussing the top growing categories, BrandWeek declaring '09 the year of the private label and CVS consolidating its battery offering to PL and 1 brand), earlier here, (amazing expansion of the PL offerings at a number of retailers; very wide consumer acceptance) and, earliest here (some firm names and initial thoughts).

Nice to see that at least one branded food company does not have its head in the sand. Heinz (NYSE: HNZ) seems to be with the program. Here are some excerpts:

"[HNZ] sees a long-lasting consumer shift to thrift and must carefully balance its business strategy in response, the ketchup maker's chief executive said on Monday...Heinz Chairman and CEO William Johnson told Reuters in an interview the company will have to weigh its approach to promotional trade spending, such as coupons, and other types of marketing as consumers continue to focus on price even as the economy in the United States and Europe improves.

"To say that consumers will return to historic norms is disingenuous," he said...

"What we're seeing right now is an industry that in some cases is grasping for volume and, as a result, has ramped up trade spending," he said.

But Johnson said the maker of Heinz ketchup, Ore-Ida potatoes and Smart Ones frozen meals would not keep resorting to that one strategy to keep sales aloft."

So, to translate in English: we have a problem. We have been selling undifferentiated products at higher prices thinking we are protected by the brands we have. We were wrong. We are getting killed by private label. Since we have huge fixed costs, some in the industry have been lowering prices to keep the volumes. We have been doing the same thing but would like to signal to the industry that we think that it is time we stop, and come up with something else. We just don't know what yet but will signal once we figure it out. HNZ is not in the worst shape, in my view, from the food majors. No one else can make ketchup of the same taste, and (as far as I know) with the same margins. They also have a good variety of higher value add products.

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Today two of my favorite staples companies were involved in deals today.

One, TreeHouse Foods (NYSE: THS) is acquiring a major player in private label hot cereal and drink mixes called Sturm Foods. I already complimented heavily TreeHouse's management in the articles above, and this deal is supportive of my viewpoint: accretive to EPS in less than a year! The market definitely liked it, and the stock was up 15-16% (mind you, this is a sleepy staple stock) following the deal announcement and increased guidance on top. Not a bad way to start Christmas week.

Two, Chattem (CHTT), a major player in OTC remedies and personal care products with a "drug" twist, is being acquired by Sanofi, a pharma major. CHTT has been a top performer in the staples area (the stock was at $3 in 2000, the deal is at $93.50/share). I already wrote in the last post that I see the possibility of a substantial drop-off in new blockbuster prescription drugs in the future. On the other hand, with healthcare becoming a worse mess by the day, one can see the argument for growth in self-medication (webMD is a pretty high traffic portal: it can't just be hypochondriacs, right?). It seems to me that Sanofi- again, a pharma major- is voting my way by acquiring CHTT and expanding their consumer OTC portfolio. If they were seeing a better future in R&D, they'd be spending that $2 bn someplace else. Though I wonder what the Parisiens think of Chattanooga, TN: "the birthplace of the tow truck, Chattanooga is the home of the International Towing and Recovery Hall of Fame and Museum" (from Wikipedia).

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