These Companies are Winning in the Grocery Aisle

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The major food brands have all been working from a similar script. First, build a popular portfolio of products, and then distribute them to an increasingly wide network of wholesale customers. The wholesale market is a critical source of profits for the industry, which naturally leads to cut-throat competition. Let’s take a look at the current winners.

Premium cup of joe

Starbucks (NASDAQ: SBUX) is back on track with Howard Schultz at the helm and new store openings around the world. In FY2012, the company reported increases in revenues and operating income of 13.6% and 15.6%, respectively, versus the prior year. After minimal store openings in FY2011, the company opened a net 1,063 stores in FY2012, primarily in the Americas and Asia-Pacific regions. Starbucks is also aggressively targeting the tea-drinking populations around the world through improved product offerings and its acquisition of the Teavana retail chain.

In FY2012, the company increased its operating profitability, despite a continued rise in certain commodity costs. Starbucks’ profit margin benefited from a greater use of the higher-margin licensed business model, which is the predominant structure for its stores in the Asia-Pacific region. It also achieved a strong 50.2% increase in its wholesale channel, as it added new customers and gained shelf space for its roster of products.

Looking ahead, the company is forecasting a comparable sales increase in the middle single-digit range and continued growth in its global store base. Starbucks expects its future growth to come from the Asia-Pacific segment, especially from India where it is opening stores in partnership with Tata Global Beverages. It is also improving the selection of food items in its stores, which will be enhanced by gains from its recent purchase of La Boulange bakery. With its name recognition and loyal customer base, Starbucks should be able to continue gaining traction in all of its markets.

Straight from the heartland

ConAgra Foods (NYSE: CAG) has transformed itself from a flour milling operation into one of the world’s largest processed food companies. ConAgra has built its portfolio of brands primarily through the acquisition channel, including the 2012 purchases of Del Monte Canada and the P.F. Chang and Bertolli frozen meals businesses. Its pace of acquisitions reached a climax in November 2012, as the company finally sealed a deal to acquire Ralcorp Holdings for $6.8 billion, after two years of off and on negotiations.

In FY2013, ConAgra has reported solid financial results, with increases in revenues and operating income of 7.8% and 69.8%, respectively, compared to the prior-year period. While sales growth primarily came from its myriad of recent acquisitions, ConAgra’s operating profitability has benefited from cost savings achieved from the integration of its global production facilities. In addition, the company has successfully offset commodity cost pressures by passing along price increases to both its consumer and commercial customers.

ConAgra bought Ralcorp in order to position itself as the leading manufacturer of private-label food products. Over the years, Ralcorp had achieved sales growth by focusing on this segment, as consumers increasingly sought out cheaper alternatives to the national name brands. The merger will allow the combined company to gain scale in the wholesale market and should add to its overall profitability, after realizing the deal’s identified synergies.

The natural newcomer

Boulder Brands (NASDAQ: BDBD) has a new name, but it has been around for some time through its Smart Balance brand of dairy and spread products. The company hit home runs with its recent acquisitions of Glutino and Udi’s, which has positioned Boulder as a leader in the natural foods category. A rapid increase in gluten-related ailments and an associated need for healthy food consumption has led to rising sales of natural food products.

In FY2012, Boulder reported a 34.8% increase in overall sales, with strong growth in its natural foods segment offsetting weakness in the Smart Balance business. The company has effectively doubled its size over the past two years, as its natural food segment has increased both its exposure and product offerings in the wholesale market. In addition, customers have given a warm reception to the company’s new products, including pretzel twists and breakfast bars.

Looking ahead, Boulder expects strong double-digit sales growth in FY2013, including nearly 50% in the natural food segment. It also forecasts rising profitability from the integration of its acquisitions, with at least $70 million in adjusted operating income during the period. While the company is a niche player in the processed food category, it appears well positioned to benefit from irreversible trends in healthy eating.

The bottom line

With limited shelf space at the nation’s grocers, investors need to focus on the food brands that are gaining space and prominent placement. These three companies have good positions in the supermarket and deserve a position on investors’ watchlists.


rghanley owns shares of Boulder Brands. The Motley Fool recommends Starbucks. The Motley Fool owns shares of Starbucks. 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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