How Paula Deen's Mishap May Impact the Market
Stephanie is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
However you feel about celebrity chef Paula Deen, it's hard to ignore the impact one person has on the business world. As major brands lined up to pull the plug on deals with Deen, many consumers wondered if it's already too late. Brands like Wal-Mart and Walgreen, which merely carried the chef's products, will likely be unfazed, but what about those brands that had closer associations?
In the 11 years since Paula's Home Cooking debuted on Food Network, Deen has amassed a vast collection of deals, including casino-based restaurants, product endorsements, and cookbooks. Many of these companies can walk away, unscathed, but the below companies may find it a little harder to get away from the association.
Food Network cancels Deen
The network that put Paula Deen's face in households across the country is still closely linked to the star. Upon hearing the news, majority owner Scripps Networks Interactive (NYSE: SNI) announced Deen's show would not be renewed at the end of her contract. The company, which also owns the DIY Network, the Cooking Channel, and the Travel Channel, among others, is doing well in the wake of an earnings report that revealed an 11% increase in earnings from the same quarter a year ago.
Following the cancellation announcement, the company revealed Deen's popularity had already been waning. Ratings for Paula's Best Dishes had dropped 15% and viewers between the ages of 18 to 49 had fallen 22%. The Food Network is one of Scripps' top earners, making the performance of shows like Deen's crucial to continued success.
Popular shows from country star Trisha Yearwood and Ree Drummond can help push Deen from people's minds. Viewer interest seems to be shifting of late anyway, with reality competition shows like Chopped and Food Network Star quickly shifting the network's general focus.
Smithfield Foods ends partnership
Smithfield Foods (NYSE: SFD) aligned itself with Deen in 2006, when the chef began promoting the products through her numerous channels. The company cited its dedication to remaining "ethical" in everything it does as the reason for ending the partnership.
The move was no surprise to those who have watched the company in recent years. A 2009 documentary, Pig Business, called out the company for its controlling stake in the grocery industry, which puts local farms out of business by providing meat at a discounted rate. In 2010, the Humane Society released undercover video of the company mistreating livestock.
The company is in the process of a buyout by Chinese meat producer Shuanghui International on the heels of a drastic loss in profit for the quarter that ended April 28. The company experienced a breathtaking $49.8 million loss in profit year-over-year, but this was due in part to an increase in 2012 profits that included insurance reimbursements. Sales rose 3.5% for the manufacturer.
So why sell to Shuanghui International? Analysts see this as a sign that the company is acknowledging low prospects in America, but at the same time, the Chinese market is a promising one, with the country's wealth an ideal place for a food company to find success.
Novo Nordisk's success
Deen initially experienced controversy last year, when it was revealed that she'd been diagnosed with diabetes in 2008. Since the recipes on her show weren't ideal for those suffering from the disease, the public expressed hostility that she had continued to promote high-fat foods while knowing she had a medical condition. Novo Nordisk (NYSE: NVO) joined forces with Paula Deen just before her condition was publicly disclosed, naming her the spokesperson for its injectable medication.
The partnership seemed to be working. In its most recent earnings announcement, Novo Nordisk announced results were up more than 12% from last year at the same time, with revenue coming in at $19.7 billion. In its first year working with Deen, the company reported an 18% increase in sales, 12% in local currencies. In its end-of-year earnings call, the company pointed to increased sales of Victoza, the very product Deen endorsed, as being partly responsible for its success.
Since Smithfield is scheduled to switch hands later this year, that leaves investors closely watching both Novo Nordisk and Scripps Networks as this publicity event continues to unfold. Novo Nordisk will benefit from an increased demand for insulins, but investors were disappointed to hear the company's highly-anticipated Tresiba, an insulin that promises a duration of more than 42 hours, will not hit the market until at least 2016. This prompted a shift in the company's sales outlook, which now stands at a 9% to 11% expected increase in sales and a slight reduction in net income.
Analysts are concerned about the Food Network's declining ratings, rating Scripps Networks Interactive a "hold" amid its most recent earnings forecast. But revenue for the company has grown consistently over the past year and revenue for 2013 is expected to hit $2.5 billion. If growth in Scripps' other channels continues, it may be able to sustain revenue increases even without a sudden ratings turnaround at the Food Network.
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Stephanie Faris has no position in any stocks mentioned. The Motley Fool recommends Scripps Networks Interactive. 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!