Conagra Brands sees margin gains after inflation, driving innovation
The Duncan Hines maker outlines the balancing act between inflation, volumes and profitability.
The Duncan Hines maker outlines the balancing act between inflation, volumes and profitability.
Brands must balance pricing that recoups cost and meets acceptable standards with consumers, while boosting profitability that is crucial to a healthy business.
That’s true at any time, but it is especially in focus at a time of high inflation. Over the last year, many CPGs raised prices as executives saw higher costs came through the supply chain, and watched as consumers shifted behavior to buy fewer items, and potentially shift to private label products. This cycle weighs on profits, as higher sales dollars do not necessarily equate to more money being made by companies at a time when prices are rising dramatically. But as inflation is starting to moderate and the supply chain is clearing up, brands are seeing room to gain back some of the margins that were sacrificed amid the economic swings of the last two years.
That’s the case at Conagra Brands. The maker of recognizable food brands like Slim Jim, Duncan Hines and Hunt’s saw “sustained recovery of our gross profit margin for a second consecutive quarter,” CEO Sean Connolly told analysts on the company’s earnings call to recap the quarter ended Feb. 26 this week.
The company’s adjusted gross margin was 28.1%, marking a 409 basis point increase over the same quarter of last year, while adjusted operating margin of 16.9% was a 321 basis point increase over that period.
Connolly said gross margin recovery is the “top priority” this year for the company. This has been helped by supply chain improvements, as well as a “pruning” of low-margin promotions, such as 10 for 10 deals on certain products. It also helps that elasticities – which measure the threshold at which customers will switch to a different brand or private label – remain “muted” in Conagra’s categories.
There’s a push and pull playing out between the prices consumers are paying, and the number of products– measured by unit volumes – that they are buying. Net sales may be higher as inflation increases, while volumes go down. But if sales growth starts to fall as inflation comes down, that’s not necessarily a negative factor if volumes improve. Connolly outlined the cycles that play out with inflation:
“Navigating these inflation cycles is pretty mechanical. You get hit with inflation, you take price, you don't reflect it right away, and therefore, you experience a lag, which compresses margins,” he said. “But then pricing catches up and margins recover as you saw us start to do really materially in [the previous quarter]. Then when you wrap these actions, dollar growth comes down and unit performance improves, both because elasticities wane and because you wrap the unit impact.”
The recovery of margins undoubtedly helps companies return value to shareholders. In Conagra’s most recent quarter, adjusted earnings per share rose 31% over last year.
But there’s another purpose: Margins fund continued improvement and new products that are geared more toward long-term growth of a healthy business.
“Our gross margins fund our innovation program, and that innovation has been the centerpiece of our playbook and our success in driving sustained category growth in our two strategic focus areas – frozen and snacks,” Connolly said. “This recovery, therefore, means you should continue to expect a relentless stream of provocative innovation and brand-building support as we go forward.”
Some of that will come in the form of products. Some will come in the form of digital marketing that drives demand. Overall, Conagra’s advertising and promotional spend for the quarter increased 23.9% to $81 million as it increased investment in social and digital marketing.
In one example of a recent initiative, Connolly said Conagra is user generated content, where brands connect with people that use their products, and allow them to their story authentically on various social platforms.
“We call those people irrefutable advocates. They live on TikTok, in Insta…we build relationships with them, and they tell our story,” Connolly said. “It's incredibly efficient.”
The story of this inflationary period is by no means over. Prices are still elevated across the economy. That’s especially true in food, where Conagra sees as being 10% for its full fiscal year, and 5.5% in the quarter that is currently happening. This means there will be more actions to bring it down by the Fed that shape consumer behavior, and a continued balancing act that brands must perform on pricing, volumes and elasticity. But as they see margins improve, there are signs that brands are moving back toward initiatives that are geared toward sustainable growth. Connolly summed up the current period this way:
“We have successfully executed pricing actions in response to inflation, that inflation is moderating, and elasticities remain remarkably consistent and benign,” he said. “We're moving past discrete supply chain disruptions and continue to make progress on our margin expansion initiatives such as productivity and value over volume, all within an environment that is normalizing.”
Dealboard has funding and M&A updates from ecommerce aggregators and forecasting software.
This week, the aggregator space is active with M&A, IKEA is ready to roll out newly-purchased warehouse management software and Authentic Brands Group acquired a boot icon. Plus, there’s new investment to report for YouTube influencer Emma Chamberlain’s coffee brand and retail forecasting.
Here’s a look at the latest deals:
Chamberlain Coffee, the consumer brand founded by YouTube influencer Emma Chamberlain, raised $7 million in new funding.
The financing included backing from existing investors including Blazar Capital, Chamberlain and United Talent Agency. New investors include Volition Capital, Electric Feel Ventures, L.A. Libations and Noah Bremen, founder of PLTFRM.
The new funding follows the launch of a Ready-to-Drink (RTD) product and coffee pods. Previously, the brand raised a Series A in August 2022.
"Creating a uniquely inviting coffee brand has been my dream for so long now, and having key investors back us allows us to build Chamberlain Coffee in ways that feel fresh and exciting,” said Chamberlain, in a statement. “There are so many products I am eager to develop and projects I'm excited to get working on. With such an incredible team and group of investors I am more excited than ever to see what the future holds for Chamberlain Coffee."
Impact Analytics, a software company for retail supply chain and merchandise planning, raised new funding from Vistara Growth.
The new investment, the amount of which was not disclosed, comes after Impact raised funding in February 2021 and October 2022 from Argentum.
The funding will help Impact Analytics further develop its Impact Analytics SmartSuite product portfolio, which is designed to help optimize forecasting, merchandising and end-to-end lifecycle pricing. Rather than the traditional forecasting approach of basing decisions on the preceding year, Impact Analytics applies a model that includes 150 variables from internal and external sources, while combining recency and history. Clients include BJ's Wholesale Club, Dick's Sporting Goods, Puma and Tapestry.
Selva Ventures, a venture capital firm focused on consumer brands that promote healthier living, closed its second fund at $34 million, TechCrunch reported.
With the new funding, Selva will invest in brands across categories including health, wellness, beauty and personal care. The fund expects to write checks of $1-2 million in seed and Series A startups, while assisting in areas like finance, operations and retail partnerships.
Backers of the second fund include Unilever Ventures, PagsGroup and Obelysk.
Nautica and Forever 21 owner Authentic Brands Group acquired the intellectual property of Hunter, a 160-year-old British outdoor lifestyle brand known for its Wellington boots.
With the deal, ABG appointed longtime partners Batra Group and Marc Fisher to execute retail and ecommerce operations, as well as continue to expand the brand in the UK and U.S., respectively.
“At the intersection of fashion and outdoor, Hunter introduces another elevated global brand to Authentic’s diverse Lifestyle portfolio,” said Authentic CEO Jamie Salter, in a statement.
Terms of the deal were not disclosed.
The investment arm of IKEA parent Ingka Group acquired the warehouse management software platform Made4Net.
As a result of the deal, Made4Net’s software will be deployed across IKEA’s 482 stores and fulfillment centers. Made4Net will continue to operate as an independent subsidiary of Ingka, with a headquarters in New Jersey. CEO Duff Davidson will remain at the helm of the company.
“Our business currently requires a better fulfillment operations system with more accurate data that better supports handling for our customers,” said Tolga Öncu, head of retail at Ingka Group, in a statement. “Our goal is to become leaders of life at home, serving more people in an omnichannel reality, whenever and however customers choose to meet us.”
European ecommerce aggregator SellerX acquired Elevate Brands, a U.S.-based aggregator.
The combined companies will be known as SellerX Group. It will comprise a portfolio that includes 80 Amazon-native private label consumer brands in categories including sports and outdoors, home, mobile accessories, pets and consumables. The portfolio will span over 40,000 products.
With the deal, SellerX Co-CEOs Philipp Triebel and Malte Horeyseck will lead SellerX Group, while Elevate Brands cofounders Ryan Gnesin, Jeremy Bell and Robert Bell will remain in key leadership positions.
“This acquisition combines our know-how and diversified portfolios of strong brands with a market-leading technology platform and strong operational infrastructure,” said Triebel, in a statement. “By leveraging our combined strengths, I am convinced we are well-positioned to drive further consolidation in the industry.”
Ecommerce aggregator Society Brands acquired Wolf Tactical, a tactical gear company.
Founded in 2017 by Tim Wu, Wolf Tactical makes products including DC belts, range belts to weighted vest and tactical backpacks.
"I started Wolf Tactical by myself as a side hustle with very limited knowledge of business and entrepreneurship. A combination of hard work and relentless learning allowed me to build it into a multi-million-dollar business," said Wu who will remain as brand president, in a statement. "With the help of Society Brands, I have access to untapped potential that I would not be able to achieve by myself.”