Faced with powerful retailers and rising commodity prices, many packaged-meat companies have found the current operating environment challenging. Hormel Foods (NYSE:HRL) has been one of the exceptions, as evidenced by its outstanding financial track record.
It has raised its annual dividend for the past 48 years, and has remained profitable and free cash flow positive during the past 10 years. Recent trends have been even more encouraging, with Hormel Foods growing its EPS by a five-year CAGR of 11% from 2009 to 2013.
The right products
While companies in the packaged-meat industry have typically focused on raw-meat products, Hormel has increasingly focused its attention on innovative, value-added product lines. These include product offerings such as pepperoni snack packages, premium hams, convenience bacon, deli meats, assorted meat party trays, and refrigerated entrees. The numbers speak for themselves, with more than 30 of Hormel's products being among the top two best sellers in their respective categories.
One notable example was Hormel's Rev Wraps, a line of high-protein, on-the-go snacks made of cheese and ham. In less than four months following nationwide distribution, Hormel reached the $30 million sales mark for Rev Wraps. Success didn't come by chance, as Hormel had done relevant background research and found that 37% of consumers have their meals on the move. Similarly, Hormel introduced two-ounce mini dipping cups for its refrigerated guacamole products so that its customers can have their favorite guacamole on the go.
Capitalizing on consumer trends is key to the development of new products, and Kraft Foods is no exception. It was the pioneer of the liquid-water enhancer category with MiO in March 2011. MiO comes in three different variations: Original, Energy, and Fit. MiO Fit is a zero-calorie sports drink minus sugar and artificial coloring, while MiO Energy has added Vitamin B and caffeine to give consumers an extra boost. As more consumers have their meals consumed away from home and office, the convenience of the products offered by both Hormel and Kraft should gain greater popularity.
More importantly, new products don't fall from the sky. Both Hormel and Kraft have invested significantly in innovation and advertising. In the food industry's version of the Oscars, Progressive Grocer magazine's 2013 Editors Picks, only 123 winners were picked from submissions, with seven of Hormel's new products being awarded. After crossing the $2 billion mark for sales from new products in 2012, Hormel isn't resting on its laurels. Instead, it has set another ambitious target of $3 billion in new product revenue contribution by 2016.
In Kraft's case, it used to spread its advertising spend across too many new products. Kraft did a study of 2009 product launches and discovered that the best-selling products were exactly the same ones on which it spent the most advertising dollars. As a result, Kraft started to identify Tier-1 products, and increased spending for each of them by fivefold to approximately $25 million per launch. MiO Fit, introduced in 2013, was one such successful case study of focused advertising spend.
The right deal
In January 2013, Hormel completed the acquisition of the Skippy peanut butter business. Apart from adding another value-added non-meat protein brand to its portfolio, this deal allows Hormel to significantly expand its geographical presence.
Skippy boasts a wide geographical footprint, with its products being sold in 30 countries on five continents, while Hormel is primarily a domestic business with its international business segment accounting for about 5% of fiscal 2013 sales. At the product level, Hormel can capitalize on Skippy's distribution network spanning more than 100 Chinese cities, to expand its product and brand presence in China.
Another food company that has transformed itself with acquisitions is Post Holdings. Suffering from the long-term secular decline in cereal consumption, Post Holdings has engaged itself in eight M&A deals in the last 12 months, including the most recent purchase of processed egg producer Michael Foods, to diversify its operations.
While Post Holdings used to derive 100% of its revenues from cereal sales, it will become a diversified consumer-food company, with cereal making up only about a quarter of its pro forma sales. With the addition of Michael Foods, Post Holdings will also be the domestic market leader in egg and refrigerated potato products.
Both Hormel and Post Holdings have leveraged on their M&A strategies to be stronger companies in the competitive food industry.
Foolish final thoughts
In fiscal 2013, Hormel grew its sales and diluted EPS by 6% and 5%, respectively, to $8.8 billion and $1.95, which represented new historical highs for the company. This shouldn't come as a surprise given that Hormel has positioned itself for success in the food industry by focusing on the right products and the right deals.