Skipping Into China On Peanut Shells

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Hormel Foods (NYSE: HRL), the owner of Spam, Dinty Moore canned stew, Jenne-O turkey products, and Hormel Chili, just shelled out some big bucks for Skippy peanut butter, the number two peanut butter brand in the United States.

While the addition is said to “balance” Hormel’s pantry line, the acquisition is a carefully spread out strategic move to gain traction in the explosive Chinese market in which Skippy is the top-selling peanut butter. The $700 million deal inked with Unilever includes Skippy’s two manufacturing plants in Little Rock, Arkansas and Weifang, China.

The move is brilliant on Hormel’s part. Some might be wondering if management got a bit worried watching Hostess, the owner of the iconic Twinkies, Drakes’ Cakes and  Wonder Bread, succumb to bankruptcy? Nah! Hormel has substance. While man does not live on sugary snacks and bread alone, add a smear of peanut butter and he could last a good long while. Plus, Spam, sometimes called mystery meat, stands the test of time. The jokes about the shelf life of the sugar laden Hostess Twinkies and Hormel’s Spam have been flying for decades. Here, Spam has the edge. Its shelf life is approximately five years. And while urban legend has it that Twinkies last indefinitely, the actual shelf life is a mere 25 days.  For inquisitive minds, Spam is made up of just five all natural ingredients: chopped pork shoulder and ham meat, salt, water, a touch of sugar, and sodium nitrate (a preservative). In comparison, it takes 27 not-so all natural ingredients to create a Twinkie, rest-in-peace.

But I digress; back to Spam, Skippy and Hormel’s plans.

Spam is sold in some 93 countries worldwide. In Korea, it’s marketed as a gourmet food item and is sold in chic presentation boxes. On average, nearly four cans of Spam are consumed every second here in the U.S. It is a staple among military forces. If it were possible to line up every can of Spam eaten to date, the line would encircle the Earth more than ten times. So, I don’t think Spam is headed to the old-time favorites’ website anytime soon. But U.S. consumption of beef and pork has been waning as a bevy health conscious consumers and cash strapped consumers have cutback or cutout meat and pork products.

The addition of Skippy will provide some nice cushion to Hormel’s product offerings in the U.S. But it the thriving China market Hormel has its sights on.  Hormel hopes to get more and more Chinese households stuck on Skippy. While this rising Asian arena is very familiar with peanuts and peanut oil, the peanuty, protein rich spread isn’t as common there as it is here in the U.S. where almost 90 million jars of Skippy are sold every year. That’s roughly 3 jars every second.

The Austin, Minnesota based company expects the Skippy acquisition to add 13-17 cents per share by 2014. Skippy sales are projected to hit roughly $370 million in 2013, with approximately $100 million of that total coming from outside the states. Its biggest competitor in this area is J.M. Smucker (NYSE: SJM), owner of the number one peanut butter Jif.  Some of this 110 year old company’s brands include Folger’s Coffee, Crisco, Pillsbury, Eagle Brands and Hungry Jack. So while Hormel will compete with Smucker in the peanut butter wars, the two businesses are actually quite different. And besides, while Jif may be the fan favorite, More Skippy peanut butter has been sold than any other peanut butter in the world.

Hormel looks like it should be sandwiched into a growth-based portfolio. Shares jumped on the Skippy news and hit a new high in the days that followed; a sure sign equity markets like the deal.


DianeAlter has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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