H.J. Heinz Company (HNZ), ConAgra Foods, Inc. (CAG), Kraft Foods Group Inc (KRFT): Three Consumer Goods Companies and the Issues Ahead

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H.J. Heinz Company (NYSE:HNZ)The food industry is facing an era of lower margins as commodity inflation is impacting its players’ performance. Costs have increased due to a rise in the prices of raw materials, packaging, and fuel. Unfortunately, transferring these costs to the consumer through pricing is not an option for the companies, since price-sensitive consumers will divert their purchases toward other, lower-priced products.

Let’s analyze three food companies to see how they handle the pressure.

Main focus on growth and expansion

H.J. Heinz Company (NYSE:HNZ) has a global portfolio of leading brands in the ketchup and sauces, meals and snacks, and infant nutrition categories. Recently acquired by Berkshire Hathaway Inc. (NYSE:BRK.B), the Warren Buffett-led investment group, and 3G Capital for $28 billion, H.J. Heinz Company (NYSE:HNZ)’s business and iconic brands will expand even further.

Since fiscal year 2008, H.J. Heinz Company (NYSE:HNZ) has been increasing its investments in marketing almost 10% each year. Management focuses on driving growth in its 15 core brands, which recorded 5% organic growth in fiscal year 2012. Growth perspectives are good for the company. Global ketchup sales grew 8%, reaching more than $5 billion in fiscal 2012. Since the ketchup and sauces category represents almost half of the company’s sales, I expect Heinz to profit from a market that has not yet reached its full potential.

Ralcorp acquisition starting to show results

ConAgra Foods, Inc. (NYSE:CAG) is one of North America’s leading food companies, serving restaurants, grocery retailers, and other food service establishments. The company’s EPS for 3Q13 was $0.55, only $0.04 higher than the prior-year quarter. Net sales grew 13.4%, reaching $3.85 billion, driven by contributions from acquired businesses and increased volumes. On the other hand, operating profit is in decline, reaching 11.8%, against 14.2% in 3Q12 due to a rise in operating expenses.

In January 2013, ConAgra Foods, Inc. (NYSE:CAG) acquired Ralcorp Food Group, subsequently hitting a record in revenue. Ralcorp generated $292 million in sales and $22 million in operating profits during the quarter, reinforcing the company’s finances and strategic position in the frozen bakery and food products categories. In addition, the company’s plans to form a new mill, along with Cargill and CHS, are expected to outplace ConAgra Foods, Inc. (NYSE:CAG)’s current earnings.

ConAgra Foods, Inc. (NYSE:CAG) has a strong B2B presence and well-positioned brands focused primarily in the North American market. However, the company’s debt is growing due to the Ralcorp acquisition and a 30% YoY increase in marketing expenditures.

Cost savings, innovation, productivity improvements

Kraft Foods Group Inc (NASDAQ:KRFT) is a consumer packaged food and beverage company focused on convenient meals, refreshment beverages and coffee, cheese, and other grocery products.

The company reported earnings of $0.88 per share for 1Q13, surpassing most analysts’ estimates. Net revenue increased 2.1% YoY, reaching $4.55 million, carried mostly by advertisement and innovation investments. Organic revenue increased 2.1% as well, driven by volume gains and improved product-mix.


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