Volume Growth Remains a Headwind for These Companies

Faizan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The processed food industry has been going through tough times lately as volumes are deteriorating. Rising price levels and weak economic conditions are considered to be the primary reasons behind the volume declines. I believe that declining volumes also signal that developed markets have reached their maturity level and there are less growth opportunities offered by these markets.

Among the top 20 food categories, sales volume decreased for 14 categories over the past year. The $70 billion frozen food industry needs to come up with the solution for the problem; otherwise things can turn out really messy for the industry.

The volume pullback

General Mills (NYSE: GIS) has been losing market share, which has adversely affected the stock price. In the first quarter of 2013, the company lost market share in six of its top 10 categories, with highest share loss of more than 4% in the yogurt category as compared to prior year. In the last month, General Mills' sales and volumes have dropped by 1.4% and 0.5%, respectively. However, if we look at last 12 weeks' stats, the company enjoyed sales growth of 0.3% and volume surge of 1.9%, mainly due to 1.5% reduction in prices. Two food categories, snacks and canned soup, have experienced share gains of 9% and 8%, respectively, in the last twelve weeks as the company improved its distribution channels.

Sales volume growth has also been an ongoing concern for ConAgra Foods (NYSE: CAG). The company has realized the sales growth problem, and intends to boost its advertisement spending to support and grow its sales volume in the given circumstances. In 3Q 2013, the company registered flat organic sales on a year over year basis, as volumes were down 3%, offset by a price rise of 3%.

However, in the recent twelve weeks, the company suffered sales and volume drop of 1.7% and 0.6%, respectively, despite a 1.1% reduction in prices.  

Volume drop persists in the North American grocery business of Kraft Foods (NASDAQ: KRFT). In the last one quarter, the company's volumes have taken a hit, going down approximately 8%, but partially offset by a price increase of 7%. Cheese and Nuts have been the only sources of growth for Kraft lately. Both the categories contribute 26% and 5%, respectively, and total revenue and sales volumes were up 4% and 9%, respectively in the last quarter.

How to overcome the problem of dropping sales volume?

The companies can boost their advertisement and promotional activities to build consumer loyalty. All the aforementioned companies have enough potential to grow their advertisement expenditure due to their low level of spending in this area. The following table shows advertisement spending as percent of sales for the three companies.

Companies

Advertisement Spending as % of Revenue

General Mills

6%

ConAgra Foods

3.5%

Kraft Foods 

3%

Source: Annual Reports

All three companies can afford to increase their advertisement spending to an industry average of 8% of total revenue, which creates a potential for the companies to fuel volume growth. Promotional activities can also be used to give support to the dropping volumes by increasing discount price offers and opting out for other promotional activities.

Consumer tastes and preferences change time to time, leaving product innovation as a very useful tool for consumer companies to compete successfully and survive in the competitive industry. All three companies have realized the need of product innovation and have been working on it, which should result in increasing or maintaining their market shares and volumes.  

Moreover, the U.S. has started to recover from a weak economic environment, evident by the stock market rally; the S&P is up 15% year to date. Furthermore, the Fed is expecting the unemployment rate to drop to 7.25% and 6.65% in 2013 and 2014, respectively. This will increase economic activity and the purchasing power of people. The drop in the unemployment rate and improved economic conditions will translate into higher demand for branded consumer products. 

Risk

If the economic conditions remain sluggish or are slow to improve, volume decline remains a threat for the food industry. As private label brands are troubling market share of branded food companies, they will be continued to be preferred by the consumers as they are relatively cheaper than branded food.

Final words

Declining volumes are a significant hurdle. The branded food companies need to boost their promotional and advertisement spending to overcome the problem of declining volume. These advertisement and promotional initiatives will create brand loyalty and encourage consumers to buy branded products that will bode well for the above mentioned three companies. Product innovation and improved economic activity are the other important factors that will favor the three companies.

With the American markets reaching new highs, investors and pundits alike are skeptical about future growth. They shouldn't be. Many global regions are still stuck in neutral, and their resurgence could result in windfall profits for select companies. A recent Motley Fool report, "3 Strong Buys for a Global Economic Recovery," outlines three companies that could take off when the global economy gains steam. Click here to read the full report!


Faizan Chudhry 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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