The Party is Over. CPG execs have to manage.
The Party is Over. CPG execs have to manage.
Conagra saw a big slow down due to price increases. Now it's time for CPG managers to manage.
Conagra Brands is grappling with a harsh reality as its second quarter comes to a close– the days of passing price increases to consumers might be ending.
The company, known for products like Hunt's canned tomatoes and Healthy Choice frozen meals, reported a decline in total sales revenue to $3.2 billion, marking a 3.4% drop in organic net sales. This decrease primarily stems from lower volumes year-over-year as consumers shift their preferences to other food options. CEO Sean Conolly explained to investors, "After five years of consistent strength, we observed a trend of consumers opting for multi-serve meals and scratch cooking as budget-friendly alternatives."
In its key frozen segment, which drives high margins through brands like as Healthy Choice and Duncan Hines, Conagra recorded a decrease in operating profit to $279 million for the quarter, down 18% from the previous year. This downturn was mitigated by aggressive promotions and advertising targeted at retailers and consumers. The company plans to increase its advertising spending by 20% for the rest of the year.
At the start of the year, the company predicted it would grow sales by around 1%. Now, it’s projecting sales to decline by 1-2%.
A year ago, Conagra Brands led the way in the packaged food industry as it adapted to a new normal. COVID forced companies to build efficient but resilient supply chains, while also giving the companies cover for to raise prices. Surprisingly, consumers didn’t run from the price hikes. This allowed operating margins in Conagra’s Frozen Food division to peak at nearly 22% in Q2 of 2021—a full 300 basis points higher than pre-pandemic. The next year the company faced supply chain hiccups, which damaged margins, only to rebound in 2023.
Now, the company has a well operated supply chain, but high prices are crushing volumes and pulling margins in the company’s keystone division.
To rebound, CPG companies needs to actually build brands, promotion strategies. Offer value. Basically, to drive growth executives have to well, manage.
Conagra says its committed to doing so. Time will tell.
Understanding Tightening Margins
Conagra’s Operating Margin has declined over 2% since last year, here's a breakdown of why:
Conagra sold more low-cost items this quarter, like Banquet pot pies, and fewer high-cost items, like Bertolli multi-serve meals. This shift in sales towards cheaper products tightened margins.
The company spent more on slotting fees this quarter to promote a variety of new products. This increased operating expenses, which tightened margins .
The price of tomatoes increased, which allowed Conagra Brands to raise the price of tomato products; this boosted topline revenue but was largely margin-neutral.
The result is, well, less margin.
Competition with both restaurants and other manufacturers.
Management said that when eating out becomes too costly, people buy groceries, often choosing their products. "The price gaps versus away-from-home tend to take care of themselves," Conolly observed.
Management is marketing their frozen Birds Eye products against less expensive canned vegetables. The advertising campaign emphasizes that Birds Eye provides superior quality and value, setting it apart from the cheaper alternatives in the canned vegetable category.
They said it:
CEO Sean Conolly on consumers switching from buying Conagra’s Products.
“They do not want to do that. I can assure you, I've been in food for 30 years, that's the last thing they want to do, they don't like to cook, they don't like to clean, they don't like any of that, they'd rather be buying our stuff.”