With stalwarts such as Kraft (NYSE: KFT) and General Mills (NYSE: GIS) in its ranks, the packaged-foods group often appeals to investors with the promise of moderate but stable growth. However, a just-released study by Consumer Reports suggests that shareholders of such companies may experience indigestion ahead.
Tastebuds tell the tale
Historically, the biggest risk for food producers has arguably been volatile commodity costs, which can squeeze the fat out of margins faster than companies can raise product prices. More recently, though, cheaper goods sold under private-label and store brands have raised a credible threat to the dominance of national brands. Market-share data has told that story for years, but now Consumer Reports has iced the cake with an actual taste test.
With experts sampling foods across 29 categories, blind taste tests revealed that store-brand foods matched or bested their national brand competitors in 23 of the 29 face-offs. Target (NYSE: TGT), Costco (NYSE: COST), and Wal-Mart Stores (NYSE: WMT) all boast products that beat out the big-name competition.
While the tastes may be similar, the costs definitely aren't. Store-brand foods included in the study sell at an average 27% discount to their name-brand brethren, with the widest reported gap spanning the difference between Costco's vanilla extract at $0.35 per ounce and McCormick's (NYSE: MKC) product at $3.34. Grab your loose change and Bundt pans, bakers.
What's more, Consumer Reports' expert verdict holds flavor in the real world: A Nielsen survey showed that 63% of consumers believe private-label product quality matches that of name brands, while 33% rank private label superior. As if that's not enough to make blue-chip boardrooms sit up and take notice, the private-label and store brand strategy is evolving, says researcher Mintel, moving beyond the "knock-off" model into full-fledged product innovation.
Shop smart
So what's the investing move, Fools? It's no secret that I've been fairly upbeat on many of the name-brand packaged-foods producers, but I've also suggested that investors grab some exposure to the private label/store brand trend as a hedge. My take is little changed today.
Shares of private-label specialist TreeHouse Foods (NYSE: THS) are up 26% since I penned an enthusiastic piece on the company's prospects. TreeHouse stock's rapid rise far outpaces the industry's -- and potentially limits near-term gains. Alternatively, consider Wal-Mart, whose recently revamped Great Value name is the largest food brand in the country, by both volume and dollar sales. Furthermore, Kroger's Dillons stores division benefits smartly from store brands.
Of course, owning shares of a food retailer involves a variety of operational risk, making the strategy an imperfect hedge. The safest course, then, may also be the simplest: Invest in the industry's classic blue chips only if you can purchase a margin of safety. Disciplined buying, after all, is gentle on even the most sensitive stomach.
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