The strategy is still strong, but Hormel experiences growing pains as it transitions into a branded food company.
Hormel is transitioning into a branded food company, but growing pains saw its stock drop 9% after the company missed earnings estimates.
The good news is that Hormel sold over $3b worth of products last quarter, an increase of 6 percent from the previous year. The bad news is that the record sales result from inflation—not any real growth. Volume-wise, the company behind Jennie-O, Planters, and Spam sold about 9% less than it did during that same time frame last year. Like any good executive, CFO Jacinth Smiley tried to spin the results. “These declines,” Smiley said, “were in line with our expectations.” Smiley blamed several factors—including the company’s overall shift into a branded consumer product company. The strategy resulted in Hormel cutting a fair amount of high volume, but not super profitable, items from distribution.
Wall Street wasn’t buying it. Immediately after, the stock dropped 6.5 percent. Today, about two weeks out, it’s down about 9%.
Hormel is transitioning into a branded food company.
Hormel Foods was founded in Austin, Minnesota in 1891. The company concentrated on the packaging and selling of butchered meats for the first seventy years of its existence. Some of the products carried their logo; others were for butcher’s shelves. This type of business is dependent on market power and commodity prices—both are interconnected. The bigger the meat processor is, the more it can insulate itself from commodity swings.
In the 1980s, the company shifted out of fresh red meat and into processed products and turkey. The company bought Jennie-O turkey in 1986 and started expanding into packaged protein. In just under a decade, Hormel went from a $150 million regional player to a national company with over $2 billion in annual sales. Today the company sells about $12 billion.
Hormel is trying to reinvent itself once again. The company is looking to establish itself as a full-blown branded food company. It diversified outside meat and protein by acquiring Skippy Peanut Butter, Planters Nuts, and Corn Nuts. The key difference between a meat processor and a branded food company is the operating model.
After accounting for production costs, a meat processor typically earns $10-$15 for every $100 it sells. The sheer volume of sales makes up for the low margins. With $45 billion in revenue, Tyson generates over $4 billion in profit yearly, despite having 15% margins.
On the other side is a company like Kraft-Heinz. Kraft-Heinz spends a significant amount every year building brands—through marketing and trade spend. This allows the company to command a price premium on its products and deliver gross margins upwards of 30%.
As you can see, Hormel has a long way to go.
Hormel’s first step was a re-organization
In August, CEO Jim Snee announced that the company reorganized its internal operations. This is one of those little changes that corporations make that have massive impacts. "We used to segment food based on the temperature of the product," Snee said. "That's not necessarily how customers and consumers think about us and our products."