The Current, delivered daily.
For the last couple of years, few words have been repeated more than “economic uncertainty." So when leaders describe how things are going to according to plan, it stands out.
On Conagra’s Q2 2023 earnings call on Thursday , executives outlined how preparedness enabled them to deliver organic net sales growth of 8.6%, margin gains and raise the outlook for the full year. In the process, they offered a primer on important aspects of shifts in consumer behavior in the process.
CEO Sean Connolly used words like “predictable” and “mechanical” to describe the effects of inflation on the business that oversees a large portfolio of brands such as Slim Jim, Duncan Hines and Boom Chicka Pop.
“Everything we're seeing is very consistent directionally with....what we've expected,” Connolly told analysts.
Supercycles of inflation
Connolly was referring to the “supercycles” that inflation brings, and a CPG company’s response. In these cycles, companies see inflation in the supply chain, raise prices on products to offset their costs and monitor for changes in consumer behavior as a result of those increases, as measured by elasticity.
Connolly described the mechanics Conagra is seeing like this: “Inflation hits, you announce price to customers, 90-day clock starts ticking, then the customer's 90-day clock expires, elasticities exist, but they're, in fact, benign relative to history and consistent overall, and margins recover,” Connolly said. “And sometimes, if it's multiple waves of inflation, you rinse and repeat that whole process.”
Connolly talked about this cyclical nature as the company entered a phase of “margin recovery” at the end of the last quarter. It is seeing inflation begin to moderate, so the prices are beginning to catch up to costs. The company's adjusted gross margin of 28.2% represented a 310-basis-point increase over the second quarter of last year. The adjusted operating margin of 17% was a 237-basis-point increase over that same period.
Still, there is some anomaly about this time of high inflation.
“What's been unusual in this cycle is the sheer magnitude of the inflation supercycle,” he said. The company saw inflation earlier than most, and has gone through multiple waves of price increases.
“The sheer number of those waves is now slowing down. And that is why you're seeing the sharp recovery, and sometimes it slows down faster than you might expect, which is why the recovery might come in faster,” Connolly said. “But overall, the mechanics of it are very predictable.”
Trading down and portfolio resilience
Another closely-monitored dynamic during inflationary periods is among consumers. When prices are high, there is a chance that they will change consumer behavior, whether that is eating more at home instead of going out, or opting for smaller or store brand goods.
Connolly said Conagra’s portfolio as currently constructed isn’t as susceptible to trading down. On this topic, he again offered a clear explanation of how the economic environment filters down to the consumer.
“The first big trade-down is the trade-down from away-from-home to at-home. If you're looking at consumers over $100,000 a year income, you're still seeing they're going out to eat. But below that threshold, it's not where it was pre-pandemic,” Connolly said.
After eating at home due to health concerns in the pandemic, large numbers of younger consumers and others are still opting to stay in during inflation to save money. That’s helping to keep elasticities, which measure the threshold at which consumers will switch to a different habit, size or brand, "muted and well below historical norms," Connolly said.
“There was a trade-down into at-home eating during COVID, and that has not fully reverted to away from home because the prices away from home have gone up so high that it's a better value to continue to eat in home as people are trying to stretch their household balance sheet. And we are the beneficiary of that,” Connolly said.
Private label purchasing is starting to show signs of growth. This tends to show up in commoditized categories like cooking oil or ibuprofen.
“When the consumer knows it's a single-ingredient product and one is a lot cheaper than the other, the switching costs are lower, it's easier to make the trade down,” Connolly said. “The good news for us is we don't have a lot of those categories.”
In recent years, Conagra overhauled its portfolio. In particular, it is emphasizing snacks and frozen foods. In the process, it exited categories like peanut butter, liquid eggs and cooking oil that were more susceptible to private label switching.
“We've done a lot of reshaping of the portfolio to be more resilient for a cycle like this, and we're seeing it in the data,” Connolly said.
The economy rises and falls. Take steps during the good times to understand what happens during challenging times and prepare a business to weather any situation. It leaves you ready to respond when the dip comes.
Below, find a snapshot of Conagra's Q2 2023 earnings.
(Photo via Conagra)
Trending in Economy
Campbell Soup Company CEO Mark Clouse offered thoughts on messaging amid inflationary shifts in consumer behavior.
After months of elevated inflation and interest rate hikes that have the potential to cool demand, consumers are showing more signs of shifting behavior.
It’s showing up in retail sales data, but there’s also evidence in the observations of the brands responsible for grocery store staples.
The latest example came this week from Campbell Soup Company. CEO Mark Clouse told analysts that the consumer continues to be “resilient” despite continued price increases on food, but found that “consumers are beginning to feel that pressure” as time goes on.
This shows up in the categories they are buying. Overall, Clouse said Campbell sees a shift toward shelf-stable items, and away from more expensive prepared foods.
There is also change in when they make purchases. People are buying more at the beginning of the month. That’s because they are stretching paychecks as long as possible.
These shifts change how the company is communicating with consumers.
Clouse said the changes in behavior are an opportunity to “focus on value within our messaging without necessarily having to chase pricing all the way down.”
“No question that it's important that we protect affordability and that we make that relevant in the categories that we're in," Clouse said. "But I also think there's a lot of ways to frame value in different ways, right?”
A meal cooked with condensed soup may be cheaper than picking up a frozen item or ordering out. Consumers just need a reminder. Even within Campbell’s own portfolio, the company can elevate brands that have more value now, even if they may not always get the limelight.
The open question is whether the shift in behavior will begin to show up in the results of the companies that have raised prices. Campbell’s overall net sales grew 5% for the quarter ended April 30, while gross profit margins held steady around 30%. But the category-level results were more uneven. U.S. soup sales declined 11%, though the company said that was owed to comparisons with the quarter when supply chains reopened a year ago and expressed confidence that the category is seeing a longer-term resurgence as more people cook at home following the pandemic. Snacks, which includes Goldfish and Pepperidge Farm, were up 12% And while net sales increased overall, the amount of products people are buying is declining. Volumes were down 7%.
These are trends happening across the grocery store. Campbell is continuing to compete. It is leading with iconic brands, and a host of different ways to consume them. It is following that up with innovation that makes the products stand out. Then, it is driving home messaging that shows consumers how to fit the products into their lives, and even their tightening spending plans.
Campbell Soup is more than 150 years old, and has seen plenty of difficult economic environments. It is also a different business today, and will continue to evolve. At the end of the day, continued execution is what’s required.
“If it's good food, people are going to buy it, especially if it's a great value,” Clouse said.