Hormel's Interesting Sweet Market Solution

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

Hormel Foods (NYSE: HRL), a global producer and distributor of customer-branded goods, continually expands its expertise, novelty, and capabilities in pork and turkey production and advertising to provide recognized, quality products to the international market.  Throughout the years, the company has been enjoying a solid status among buyers, merchandisers, foodservices, and industrial consumers for goods substantially regarded for high quality, nutritional content, taste, expediency, and value, amongst many others.

Hormel Foods Fuels its Quarterly Share

Recently, Hormel Foods announced that it is modifying its cut-off date for its investors to collect their quarterly dividend imbursement.  Furthermore, the company will disburse a surplus of 17 cents per share on Feb. 15 to its depositors of record as of Jan. 22.  This is notably a day later than the previously announced date that the company affirmed when it initially publicized the dividend growth in November.

On the other hand, the percentage differences in share prices of relative stocks in the same sector include a 1.85% increase for Tyson Foods (NYSE: TSN), a 2.01% growth for Smithfield Foods (NYSE: SFD), and a 4.68% rise for Pilgrim’s Pride (NASDAQ: PPC).  Tyson Foods, an American global corporation situated at Springdale, Arkansas, is the second biggest producer and dealer of beef, chicken, and pork worldwide.  Conversely, Smithfield is the largest pork processor and manufacturer in the global market, while Pilgrim’s Pride is the largest chicken manufacturer in Puerto Rico and the United States.

Hormel Buys Skippy Peanut Butter for $700 Million

Hormel, globally recognized as the supplier of Spam and other meat and turkey products, announced that it is acquiring the 80-year-old brand of Skippy peanut butter, which is its largest purchase to date, for $700 million.  Once the deal comes to fruition, it will make the company the second best-selling provider of peanut butter in the U.S. marketplace.

In addition, Skippy can serve as Hormel’s key to penetrate various international markets, predominantly China.  The deal disclosed Thursday will instantaneously increase the company’s international transactions and sales by 30%, and Jeffry M. Ettinger, the company’s CEO, expressed that Skippy’s global reputation will be a good asset in boosting Hormel’s recognition in the global market. 

Hormel will provide the peanut butter brand’s offices in Austin as soon as it acquires Skippy, which has been under the ownership of Unilever (NYSE: UL) since the year 2000.  The deal, which entails regulatory approval, consists of Skippy manufacturing spots in Little Rock, Arkansas, and Shandong, China as well, and concludes early this year.

Unilever, a multinational consumer goods company based in the United Kingdom and the Netherlands, and known for its products such as Dove soaps, Lipton tea, Rexona, and Sunsilk, has announced last year that it was reflecting on selling Skippy as a part of its strategic assessment.

Several stock analysts asserted that the $700 million price tag of Skippy is somehow above what media reports think the brand should be put up for sale.  Nonetheless, investors applauded the deal in spite of its conceivably expensive price.  In fact, the company’s stock has already closed up at $33.20, which is generally up $1.19 (3.8%) for a regular day in the market on account of the said deal.

Making China Interested in Skippy Peanut Butter

Undeniably, when Hormel decided to acquire Unilever’s Skippy, it was primarily aimed at maximize its opportunities in China.  The deal was mainly effective, with the company’s shares increasing more than 3% on January 5; however, it is worth taking into consideration that the Chinese are not wholly inclined to eating peanut butter, which will give Hormel a good challenge in its attempt to expand its brand.

Nevertheless, despite the low popularity of peanut butter, Skippy is the leading brand in China, and it is extensively available in a good number of Chinese supermarkets.  As a matter of fact, its sales are on the scale of $30 to 40 million annually. 

Is the Sweet Deal Worth It?

Hormel’s acquisition of Skippy for $700 million is likely an effective supplement to its sales strategy in bringing its current meat products into the Chinese market, along with other international outlets.  Even though the peanut butter awareness in China is low, young Chinese people seemingly become fond of the product upon their first consumption, as anchored in recent news and social networking websites.

In a related statement, Hormel asserted that it intends to make use of Spam, its luncheon meat product, as the key to sell more units of Skippy in China.  Ettinger even hinted at possible advertising and marketing synergies between the two brands in order to take the presence of both its meat and non-meat products to new heights.

What is excellent about this strategy is that it will allow the company to develop their recognized brand in the core of the market with a non-meat product.  Based on the company’s fourth-quarter earnings statement, only 16% of its net sales came from non-frozen goods; however, with the addition of Skippy peanut butter to its products, it will undeniably go through a series of upsurges in the coming years.

JosefRayDagatan has no position in any stocks mentioned. The Motley Fool recommends Unilever. 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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