ConAgra Foods Inc (NYSE:CAG) delivered a blow to thousands of employees this month when it announced plans to cut as much as 30% of its office workforce. The move is part of the new chief executive Sean Connolly's cost-cutting efforts, which he hopes will help turn things around for the struggling packaged foods company. Let's take a closer look at what is hurting ConAgra and how the conglomerates' latest move will affect shareholders going forward.
A move forward or a step backwards?
As part of the planned job cuts, ConAgra Foods will also move its headquarters from Omaha, Nebraska to Chicago, Illinois. The physical relocation of the company's HQ was primarily driven by corporate tax incentives promised to ConAgra by the city of Chicago. However, the company isn't completely cutting its ties with Warren Buffett's hometown. ConAgra will, in fact, keep some corporate offices open in Omaha with about 1,200 employees set to remain in the area, according to the Wall Street Journal.
Nevertheless, the move to Chicago could prove a smart one if it helps ConAgra attract better talent. Chicago, after all, is quickly transforming into a corporate paradise with dozens of high profile companies setting up shop in the Windy City in recent years including Google, Nike, Motorola, and Archer Daniels Midland. This decision also makes sense from a logistics standpoint because ConAgra already has offices in Naperville, a suburb of Chicago. Those Naperville jobs together with top executives from Omaha and ConAgra's frozen-foods division in Nebraska will all be relocated to downtown Chicago.
The company behind brands such as Chef Boyardee and Orville Redenbacher's popcorn has struggled in recent years amid weak sales and shrinking margins as more consumers opt for fresher and less processed options.
This restructuring plan, therefore, is ConAgra's answer to deteriorating profits. Part of the problem is that unlike industry rivals such as Kraft Foods, ConAgra struggles to wield significant pricing power because of its portfolio of so-called "second-tier brands," which include frozen meals and canned pasta. ConAgra's Hunt's ketchup, for example, is often considered the off-brand option to better known Heinz branded ketchup. Hunt's ketchup costs around $1.99 per bottle or half of what a comparable bottle of Heinz ketchup runs. Ultimately, this means ConAgra boasts a portfolio of lower margin brands versus rivals in the space.
Kraft Foods is also a stronger competitor following its merger with Heinz earlier this year. This has led to increased competition for ConAgra in the foods products manufacturing industry.
Time to change things up
While cutting jobs is never a good thing, these cost-cutting measures are necessary to ConAgra's future. Down the road, these initiatives should help restore the shareholder value that has been slowly eroding due to shifts in consumer habits and increased competition. ConAgra plans to cut $300 million in operating costs over the next three years. This seems more than reasonable, particularly compared to a rival like Kraft Foods, which has saved nearly a billion through cost-cutting measures in recent years.
Part of ConAgra's strategy includes streamlining its branded foods business. This would involve "eliminating excess ingredients that go to waste and cutting back on the variations of supplies it buys so it can get better bulk pricing," according to the Wall Street Journal. Shareholders also shouldn't be surprised if the company decides to drop some of its lower-margin products or brands in order to better control manufacturing costs going forward.
There is also the sale of its private-label business, which ConAgra announced in June, just one month after Mr. Connolly took the helm. It has only been two and half years since ConAgra paid $5 billion to purchase the private-label unit from Ralcorp, which makes cereal, condiments, and snacks for grocery store chains to brand as their own. Unfortunately, poor execution of its private-label acquisition and limited overlap between Ralcorp's business and ConAgra's core business led to a significant drag on profitability. Therefore, shedding its private-label unit is a smart move for ConAgra's future, despite it being a near-term loss for the company.
Ultimately, these strategic moves should free up ConAgra's resources and enable its management to better focus on the core business. While it will take time for these moves to fully restore shareholder value, shareholders can rest easy in the meantime knowing that the company is taking the necessary steps to turn its fortunes around.