Lamb Weston continued its role as a star performer for ConAgra Foods in the second quarter of fiscal 2016 ending on November 29. The frozen french fry, potato specialty and appetizer producer, which will be spun off as a separate operating unit next year, made the greatest contribution to the Commercial Foods segment’s $162 million operating profit (up 11%) realized from sales of $1.1 billion.
ConAgra’s total revenues slipped to $3.09 billion from $3.14 billion rung up during the same quarter the year before. This was attributed to a 3% decline in the Consumer Foods segment, where a $331 million operating profit was realized from approximately $2 billion in sales.
Sean Connolly, chief executive officer and president of the Omaha, Nebraska, USA-based company, which will soon relocate headquarters to Chicago, reported that Lamb Weston’s performance was particularly robust in international markets, while business in North America continues to show positive growth momentum thanks to key customers in the quick service restaurant and operator distributor channels.
“Lamb Weston remains well positioned to capitalize on the significant international growth opportunities,” said Connolly. “We have and we will continue to invest in this business to support our customers’ growth internationally.”
Retail frozen products posting strong growth in ConAgra’s Consumer Foods portfolio were Marie Callender’s, P.F. Chang’s Asian cuisine range and Kid Cuisine. Showing a volume decline was the Banquet line, which is now evolving from budget-priced status into a higher-tier range of ready meals.
Banquet Table Set for Margin Over Volume
In an earnings conference call with food industry stock analysts on December 22, Connolly commented: “Banquet represented the vast majority of the second quarter volume decline, as planned. Nevertheless, we believe our plan is the right one for long-term brand health and financial strength. We have launched a comprehensive program to restage the Banquet franchise and liberate it from the $1 price point. The higher price points enable us to invest in higher quality, including more protein.”
He continued: “As expected, we experienced an elasticity effect on consumer demand tied to the new pricing and reduced trade promotion frequency. But we also launched a new marketing campaign late in the quarter to introduce consumers to Banquet’s new value proposition. Not every consumer will transition with the brand because some are only about price, but given the higher quality we will attract new consumers to the franchise over time, as well as improve the buying rate of brand loyalists.”
A major PR drive is being fueled by a quadrupled marketing budget and return to television advertising for the first time since 2009. The commercials emphasize that Banquet’s Salisbury Steak Meal now features “25% more food,” that pot pies contain 20% more chicken, and that cream has been added to mashed potatoes.
In the question and answer session following presentations made by Connolly and other ConAgra executives during the conference call, Ken Goldman of JPMorgan suggested that historically the Banquet brand been “sort of the de facto private label entry in the category,” mainly or in part, because its price was so low. “As you raise the price,” he asked, “how do you prevent a private label competitor from coming in and taking share?”
The chief executive officer replied: “You don’t tend to see a huge private label presence in categories where you have a large, nearly $1 billion well-established kind of value player like Banquet. So, Banquet has effectively played that role. Furthermore, with frozen entrées in general, you don’t see a large private label presence. So, I am not overly concerned. It will still be a value, but the value proposition has changed.”
Connolly continued: “Frankly, when we talk to Banquet loyalists, some of them clearly say, ‘Hey, if you give me better quality, if you give me a little larger portion, if you give me more protein, I am happy to pay for it.’ That looks like value to me, as opposed to just being caught on price.
“By the same token, there are other consumers in there who over time have been positioned and trained to just buy on deep discount. But we don’t value that consumer purchase the same way we value the other consumer purchase, and we are getting more discerning around where we are going to, and whose volume we are going to chase. That’s part of the concern. But I would say, net-net, I am not particularly worried about that scenario at all.”
Café Steamers Steam Ahead
Replying to a question from Eric Katzman of Deutsche Bank, Connolly talked about trend lines in the frozen ready meals sector, and zeroed in on the struggles faced by marketers of meals that have been traditionally associated with dieting or weight loss.
“I think companies are refocusing on quality and they are refocusing on what the definition of wellness means for a whole new generation,” said the chief executive officer. “So, if you look at our Healthy Choice franchise as an example, it’s kind of a mixed bag. We have got in the last few years a major thrust away from the old, what I will call kind of ice cube tray type of frozen dinners that have been around forever, and into a much more innovative product that we brand as Café Steamers. So, we have actually migrated away from the historic Healthy Choice positioning to focus more on Café Steamers.”
He continued: “In this fiscal year so far, we built on that by launching the Café Steamers Simply line, which is all about clean label, low carbohydrates, much more contemporary. And these kinds of offerings are not only getting disproportionate customer support in terms of real estate, because customers are dying for growth in frozen, but their velocities are significantly better and their margins are better. So, there is going to be a migration that takes place here, and we want to participate in that and that’s why we think innovation is going to be central to getting the frozen section operating to its full potential.”
[Editor’s note: FrozenFoodsBiz.com thanks Seeking Alpha for providing a transcript of ConAgra Foods’ December 22 earnings conference call. Readers who want to review the full text may do so by visiting www.SeekingAlpha.com.]
