One Food Company Is a Safe Investment in Uncertain Times

Source: Hormel Foods

Since the global financial crisis, stock prices of many companies have been on a roller coaster ride. Certain investors prefer to invest in companies that have stood the test of time and proved resilient through different market cycles. Hormel Foods (HRL -0.95%) is one notable example. Across five, 10, 20, and 30-year time periods, Hormel has achieved a minimum revenue and earnings-per-share CAGR of 6% and 9%, respectively. It has also shared the fruits of its success with its shareholders, with an impressive track record of 47 years of consecutive dividend increases.

History aside, it is worthwhile to assess the contributing factors to Hormel Foods' success and determine if these will hold true in the years to come.

Diversified business model
Hormel Foods' business model is built along the lines of diversification, balance, and risk minimization.

Hormel is a unique hybrid of both a protein company and a packaged foods business. It generated more than $650 million or 80% of its operating profits from grocery products, refrigerated foods, and Jennie-O Turkey Store segments, with each of these three segments contributing equally to the bottom line. The sale of specialty foods and its international businesses made up the rest of its operating profits.

Secondly, it is also diversified in terms of who it sells to. Hormel derives close to a quarter of its revenue from the foodservice segment, outside of its core retail business. Hormel is well-liked by its retail customers, with more than 30 of its products ranked either first or second in terms of market share in their respective product categories.

Hormel is also popular with its foodservice customers. In April 2013, its Jennie-O Turkey Store was awarded the Poultry Supplier of the Year by UniPro Foodservice, the largest foodservice distribution cooperative in the U.S.

Thirdly, Hormel Foods also adopts an asset-medium model with respect to sourcing. While it already has significant investments in the supply chains for pork and turkey, it buys other meat products and food ingredients from agents and suppliers. In this sense, Hormel neither falls in the trap of being overly asset-intensive nor too dependent on suppliers.

Innovation and new products
Hormel is very committed to product innovation. It has already met its previous two goals of increasing sales from new products to $1 billion and $2 billion by 2009 and 2012, respectively. Looking ahead, Hormel is targeting new product sales contribution of $3 billion or 30% of total sales by 2016, compared with 21%, 26% in 2010 and 2013, respectively.

Hormel's investment in innovation is already paying dividends. Seven of its new products were selected as "2013 Editors' Picks" by Progressive Grocer magazine. Hormel Natural Choice Cherrywood Smoked Ham Deli Meat and Sun-dried Tomato Turkey Deli Meat, are two new flavors for its all-natural and gluten-free deli meat line. In this year's edition, only 123 out of 425 submissions were honored, based on criteria such as innovation, taste, functionality, and value.

Great minds think alike, and Hillshire Brands (HSH.DL) is another food company whose products have been named among Progressive Grocer's 2013 Editors' Picks. Hillshire's winning entries were Ball Park Lean Franks and Jimmy Dean Flatbread Sandwiches. The former was praised for being a healthier hot dog alternative for kids, while the latter won accolades for being a convenient breakfast option.

Hillshire has made big strides in its efforts to boost new-product innovation. In 2013, new products accounted for 11% of Hillshire's top line, up from 9% historically.

Source: Hormel Foods

Adapting to consumer trends
Good companies understand what customers want. Hormel fits the bill of a customer-focused food company. One example is its new high-protein Hormel Rev Wraps which can be consumed on-the-go. Prior to product launch, Hormel found that 90% of snacks are consumed during an activity and 37% of food was eaten on-the-go. The customer response was overwhelming, with Hormel reaching $30 million in sales with this new product in just a few months.

This draws comparisons with another on-the-go product introduced by Kraft Foods (KRFT.DL). In recent years, Kraft has concentrated its R&D and advertising spend on blockbuster products. One of Kraft's successes is MiO, its brand of liquid water enhancers. It has also introduced variations such as MiO Fit and MiO Energy, which target energy drinkers and health nuts.

The best form of flattery is imitation. Coca-Cola's Minute Maid has also recently launched a new liquid water enhancer, which gives consumers the ability to add fruit flavors to plain water.  

Foolish final thoughts
Hormel has had a great track record of consistent growth in both its top line and bottom line. Going forward, odds are that this positive trend will continue, given its balanced business model, and its ability to successfully launch new products.