Conagra (CAG 1.17%) has a collection of iconic brands and is a key partner for grocery stores and other retailers. It's also an attractive income stock for investors, with 4% dividend yield. There's a symbiotic relationship between Conagra and retailers that is important to protect, and both sides know it. That is why Conagra has been able to push through material price increases in the face of inflation. Here's one of the biggest secrets in that effort.
A tough conversation
No company wants to call its customers and tell them that price increases are in the cards. Inflation like what the United States has faced over the past year or so, however, makes that call a necessity for any company that wants to protect its margins. This time around, that conversation has happened multiple times in the food space, as input price increases have continued to ratchet higher and higher.
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End consumers appear to understand as well. As Conagra's management noted during its fiscal fourth-quarter 2022 earnings call, it has "been pleased that price elasticity has remained below historical levels." That's a fancy way the food industry says it has been able to push through price hikes without seeing too many customers shift down to lower-priced products. The numbers here are pretty significant.
For example, Conagra pushed through a price hike of 13.2% in the most recent quarter. Volume pulled 6.4% off that figure, leaving organic sales growth at 6.8%. That's pretty good for a consumer staples stock, particularly in the face of intense inflation. The big question, however, is how much further Conagra can push on price. A lot will depend on its direct customers -- retailers.
The secret to the ask
Owning big-name brands like Birds Eye, Hunt's, and Duncan Hines makes it easier for a company like Conagra to have the conversation about price again and again. Although its $15 billion market cap is far from the top of the heap, it still has the size and scale to advertise and widely distribute its wares. Retailers appreciate that support, because it makes sure their shelves are full and that customers have a reason to come to the store.
But there's another little factor that's important here that Conagra has the scale to do well: Product innovation. During Conagra's fiscal fourth-quarter 2022 earnings conference call, CEO Sean Connolly noted when asked about pricing power: "[T]he top priority for our retail customers is growth, and our retail customers here at ConAgra know that our innovation has been the absolute key to driving growth for their categories."
Essentially, Conagra's customers like to buy "new" products or "new" versions of old products. It's simply part of being human that a novel stimulus creates a response. The problem is that innovation requires investment, which Conagra's direct customers know. So they accept price increases and pass them on to their own customers (retail consumers). As long as Conagra can keep delivering innovations that get people into stores, and buying products, its retailer customers will likely be willing to accept rising prices. That's the real secret in this relationship.
A big lineup
According to Conagra management, "...we've got a big innovation slate this year." That bodes well for the company's ability to pass on its rising costs and management's ability to protect margins. As long as people keep buying those new products, there's no reason to think the virtuous cycle here will end. Investors should make sure to keep an eye on the new products being offered by Conagra and its peers. Product innovation is the hidden tool that will help consumer staples companies remain ahead of the inflation curve.
