Yummy Returns from 3 Packaged Food Leaders

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

Kellogg (NYSE: K), General Mills (NYSE: GIS), and ConAgra Foods (NYSE: CAG) are market leaders in the processed and packaged food industry, based on market capitalization.

Company

Market capitalization (in $ billion)

General Mills

37.4

Kellogg

24.0

ConAgra

14.9

These world leaders are crunching up the competition through acquisitions, improvements in major segments and growth in various regions. Thanks to the convenience of packaged food products, they are preferred by busy working individuals and families trying to maintain an easy lifestyle. This creates a rise in demand for the industry’s products. How are these leaders implementing the above strategies to remain popular among consumers?

Growth from acquisition and major segment

Last year, Kellogg acquired the world’s second largest savory snack company, Pringles, in order to expand its snack capabilities on a global level. Kellogg acquired Pringles for $2.7 billion and became the world’s second largest savory snack food maker, after Pepsi. In the first quarter, Kellogg’s sales increased 12% year-over-year, primarily due to the acquisition. Kellogg plans to grow in emerging markets through the acquisition since two thirds of Pringles’ share of the revenue came from overseas. The savory market in emerging countries is expected to reach $20.62 billion in 2016, with a CAGR of 7.1% from 2011 to 2016. Despite the risk factor presented by Pepsi in emerging markets, the company expects a cost synergy between $50 million and $75 million for this year.

In the first quarter of this year, Kellogg’s cereal segment’s sales were impacted by headwinds from adults, which were partially offset by growth in the children's market. This segment saw year-over-year sales growth of 5% in the first quarter and segment growth with the launch of Special K hot cereal in late summer. Special K hot cereal is meant for people who are weight conscious. The obesity rate in the U.S. is 27.1%, up from last year's 26.2%. This product will be popular among weight conscious adults. Last year, Kellogg modified its Special K website into a weight management site, where visitors could find and pick meal plans. This site now has more than two million members. With the huge traffic for Special K products, it will be the prime revenue generator for the company.

Betting on growth from its acquisition and new product, Kellogg hopes revenue will increase as follows:

Year

2012

2013

2014

2015

Revenue (in $ billion )

14.19

15.14

15.67

16.14

Better future prospects from different geographical segments

General Mills’ largest yogurt brand, Yoplait, currently holds 24% market share and the top position in the Greek yogurt category for the U.S. The Yoplait segment of the company saw U.S. sales decline 5% year-over-year in the fourth quarter of 2013. The decline is attributed to competitors like Chobani and Danone.

Going forward, a new yogurt is expected to launch in July 2013 and will attract more consumers, with multiple flavors such as strawberry, vanilla and coconut. This product will exceed $140 million in revenue in the first year of its retail sales. With the expected growth from this product, the company’s U.S. retail segment revenue is expected to increase:

Fiscal Year

fourth-quarter 2013 (actual)

first-quarter 2014 (expected)

second-quarter 2014 (expected)

Revenue (in $ billion)

2.47

2.54

3.08

The international segment of the company has grown robustly, driven by growth in its products portfolio. In this segment, products like Nature Valley protein and Fiber One bars each achieved more than $100 million in the first year of sales. The Nature Valley protein bar and Fiber One bars are famous among consumers as a convenient source of protein and energy.

To drive future growth from its product portfolio General Mills will launch new products this summer, including Nature Valley oatmeal squares and Fiber One 90 bars. With this launch, its international segment expects net sales to increase 5%, year-over-year, to $1.38 billion in the second quarter of fiscal year 2014.

Increasing revenue opportunities from acquisition

ConAgra Foods’ consumer food segment grew its net sales to $14.6 billion, up 34%, due to the acquisition of Ralcorp in January 2013. ConAgra acquired Ralcorp to expand its presence in the private label food industry, which includes categories as cereal, cookies and pasta. The acquisition brings $4.5 billion in private label sales to ConAgra making it the largest private label food company in North America. After the acquisition, ConAgra upgraded the pricing strategies of Ralcorp and is continuously increasing its sales force. With these strategies, Ralcorp expects to turn around in the middle of fiscal year 2013, prompting ConAgra to increase its cost synergy estimates from the earlier $225 million to $300 million in the next three years.

ConAgra's consumer food segment's frozen breakfast products have increased around 30% over the last five years. Frozen dessert pies primarily drove this growth. The product advertisements succeeded with customers, driving sales and volume. To further develop the consumer food segment, ConAgra is focusing on development of a frozen food product line with new cooking innovation and marketing strategies.. The company expects to join hands with Heinz, Kellogg, General Mills and Nestle U.S.A. to promote its frozen product line. The advertisement campaign is expected to cost around $50 million. With this, ConAgra expects its consumer food segment’s net sales to increase from $2.4 billion in the second quarter of fiscal year 2013 to $2.5 billion in the second quarter of fiscal year 2014. 

Conclusion:

Kellogg registered growth in its revenue with the acquisition of Pringles. It also faced tailwinds in its cereal segment but expects growth with the launch of hot cereal.

General Mills grew with its yogurt brand, Yoplait. It is also planning for growth in its international segment with the launch of new products.

ConAgra Foods expects cost synergies from its acquisition of Ralcorp, and it is poised for growth in its consumer food segment.

Looking at growth prospects in each of these companies, I recommend a buy.

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Madhukar Dubey 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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