Drip
Portfolio Report
Thursday, February 12, 1998
by Jeff Fischer
([email protected])
ALEXANDRIA, VA (Feb. 12, 1998) -- After looking at the business strategies behind the "new" Campbell Soup Company (NYSE: CPB) yesterday, we'll now consider Campbell's market and potential markets. We learned that the firm's soup products are the number three selling food-shelf items, by dollar volume, in the U.S. -- behind Coca-Cola and Pepsi. So how much room is there for market growth?
First, there are more than a few ways to grow sales volume. A company can:
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Increase distribution in the areas already served. This includes selling through non-traditional venues, as Campbell is with Wal-Mart and drug stores
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Move into and/or increase presence in new markets through new distribution or increased distribution
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Move into new markets through acquisition. New international markets can sometimes be more easily attacked through acquisition, acquiring the relevant leading company in a country
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Increase advertising
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Increase product prices
Number five on the list -- a company's ability to increase prices and grow sales volume -- is something that wasn't mentioned yesterday, though it could have been. Alongside with the ability to cut costs, Campbell does have pricing power. In fact, the company's pricing power is stronger than that of many food and beverage sellers, including Coca-Cola and Pepsi, and especially in the U.S. The average can of condensed Campbell Soup sells for $0.85, while the most popular soup, Chicken Noodle, typically sells for $0.66.
Last year about three-quarters of Campbell's increase in sales volume in the U.S. came from actual price increases, while one-quarter of the gain was due to product mix and straight volume. This, you can imagine, is both good and bad. Going forward, though, the company plans to increase volume through more advertising and distribution rather than relying so much on pricing power.
In the next two years, sales volume should hopefully rise both due to price increases and volume increases equally -- or, interpreted, of the 8% sales volume growth that the company aims for in the U.S. (much like Coca-Cola's 8% increase in unit case volume in world sales), about 4% of that growth should be price increases, and 4% of it straight volume gains. So price increases will slacken, but even so, stock up on soup now if you want to avoid very slow but steady price increases over the coming years. Last I looked, a can of soup is now good until sometime in 1999 or later.
U.S. -- it's a mature market with slow sales growth (except through non-traditional venues), though Campbell also has the most favorable pricing power in the U.S. What about international sales?
Internationally, Canadian sales can be compared to that of North America -- mature -- but growing slightly more quickly, while Mainland Europe is for the most part a new world for Campbell. In 1997, Campbell acquired Erasco, Germany's top wet soup company with $225 million in annual sales, and in October of 1997, Campbell bought Liebig, France's top wet soup brand with sales of $80 million. Including these companies, Campbell's overseas soup sales now top $600 million.
In 1997, overseas soup volume was up 36% including Erasco, or 10% without the new company. This year, with Liebig in the mix, sales could climb as much as 25% overseas as a whole. Over the long term, a volume growth rate of about 13% to 15% is possible overseas. In earnings per share, that could equate to growth of about 1.5 times that amount annually.
In Asia, Campbell has product in roughly 45% of the relevant Japanese food markets with arrangements to expand that amount to nearly 75% of the markets, while shipments of soup to China are growing about 40% annually. Mexico, U.K, and Australia all grew favorably last year, especially Mexico (up 30%). Large potential markets going forward should be the Eastern European countries (and former Soviet Union), though not for quite some time. The company is expanding systematically.
Campbell's strategy -- cost cutting and increasing sales of popular products -- has been working, with gross margins rising from 41% in 1995 to 46% last year, and operating margins rising from 15.8% to 18.6% over the same period. With Vlasic Foods International spun-off soon, the operating margins should rise above 20%; and with the $500 million sale of other underperforming assets planned, perhaps margins will rise even more so near-term.
It is worth noting that with the Vlasic Foods spin-off, Campbell will receive a $500 million special cash payment, some of which will probably be used to buy back shares, though the money could eliminate one-half of the current $1.1 billion in long-term debt that Campbell sports, if management actually cared to eliminate it (it probably doesn't, especially not all at once -- the debt isn't high interest). Campbell supposedly has other divestitures planned for July or so, too. Slim down to get strong. Then keep pushing forward.
Have a Foolish evening!
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