The Drip Portfolio
Through the eyes of the typical American consumer, the differences between our three finalists and Campbell are plain to see. If the average shopper is anything like Jeff or me, soup consumption is pretty consistent from month to month or even year to year. If the price is marked down, we may buy a can or two more than usual. On the flip side, there is always plenty of room in our stomachs for soft drinks and snack foods, with little regard for price. As for gum, we're more likely to toss a pack of chewing gum into the cart as a spur-of-the-moment purchase than a can of condensed soup.
These consumer-oriented observations are subjective to say the least. Every buyer is different. So instead of looking at the overall food demand picture from the buyer's point of view and drawing possibly individually biased conclusions, let's look at the supply situation through the eyes of a grocery retailer.
Soup is a mainstay in grocery store aisles around the country -- in fact, that's one of Campbell's major problems. Soup can sit on the shelves for a long time without selling, which goes a long way toward explaining Campbell's recent store-level inventory problems. Worse yet, selling a can of soup can often amount to little more than an inventory switcheroo, as the soup moves from the retailer's inventory and into the consumer's inventory (namely, the pantry). Once the household inventory is established, though, the buildup stops. Everybody expects to see soup stocked on the shelves in their neighborhood stores, but shoppers are not exactly rushing for the soup aisle to replenish their supplies every trip.
In-store promotions or end-of-the-aisle displays may help boost unit sales of soup in the short run for a store, but in the end the category is just not a major profit center. Conversely, our three finalists sell many of the most profitable items in the store. One of the most illuminating statistics I have come across during our food and beverage study came from PepsiCo, which last year estimated for analysts that 38% of profit growth for all food retailers during the year came from Pepsi and Frito-Lay products. With Coke, Keebler (NYSE: KBL), and Nabisco (NYSE: NA) products added to the mix, the profit growth percentage rises to 60% or 70%.
Earning consistently higher profits is a major challenge for the country's big grocery chains, which have been consolidating like crazy over the past few years in order to make their businesses as efficient as possible in a highly competitive marketplace. With their emphasis fixed squarely on profits, retailers today are keenly aware of which products are the most lucrative to have on hand and promote. To me, it's incredible to think that in my local large supermarket, which carries tens of thousands of stock keeping units (SKUs), a major chunk of profit growth is coming from the few hundred Pepsi and Frito-Lay SKUs sitting on the shelves. But it is, and the fact that those products do not sit on the shelves for very long is a big reason why this is true.
The nature of a product segment such as Frito-Lay is especially attractive to a retailer. For the most part, consumers do not buy Doritos or Sun Chips and horde them in the pantry like junk food-crazed squirrels. Quite often, a bag of chips will never even make it inside a consumer's house, let alone the pantry, as the buyer is likely to munch on them on the way home from the supermarket. This kind of direct shelf-to-stomach product is a food retailer's dream, as it will keep the consumer coming back to the store for more, even in between major shopping runs. How often do you rush out to the store to satisfy a craving for Campbell's split pea soup, or stop for a can of Chunky Clam Chowder to eat in the car during a road trip? Probably not often.
From the profit- and inventory-conscious retailer's point of view, carbonated beverages, salty snack foods, and gum (albeit to a lesser extent) are simply better product categories than soup because they can be turned much faster and can actually drive traffic into the store. The size of the retailing environment doesn't especially matter either, as Coke, Pepsi, and Wrigley products are sold everywhere, from mammoth Wal-Mart (NYSE: WMT) Supercenters to small gas station convenience stores to vending machines. Also a non-factor is the societal trend away from daily dinner table meals and toward eating away from home, since the companies' products can be consumed basically anywhere at anytime and require zero preparation time.
As investors trying to pick the best food and beverage company to own for the next 17 years, these qualitative factors are major issues to consider and factor into our overall analysis of the industry. Of course, we'll make sure that quantitative-minded investors get their fill, too. Next week, we will continue crunching the numbers for our three finalists.
Until then, enjoy this weekend's trip to the supermarket and Fool on!