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
Retail media networks must drive sales incrementality, a new report from the Association of National Advertisers states.
Retail media networks are creating a new layer to the relationship between brands and retailers, and a new report indicates that brands in particular are still navigating the growing pains.
The last two years brought fast growth of retail media networks, as retailers recognized the value of providing advertising opportunities through ecommerce marketplaces that grew rapidly during the pandemic, and the value of the first-party data they possessed in a world where third-party cookies and IDFA are becoming less valuable tools. For a historically low-margin business like retail, digital advertising also presents an opportunity for a high-margin business line of 50-70%.
Brands have proven to be eager adopters as they sought new ways to reach customers in this environment, as well. According to eMarketer, ad revenue from retail media networks will reach $52 billion in 2023 and $61 billion in 2024. Over the next two years, retail media will account for one in five digital ad dollars spent by marketers. The spend is only expected to grow. According to a survey from the Association of National Advertisers (ANA), 73% of brands said they expect to be spending somewhat or significantly more on retail media in the future than they do today.
However, this proliferation has also created “more marketing decisionmaking complexity for advertisers,” ANA CEO Bob Liodice said in a new report.
The need to navigate multiple networks and still-developing tools to maximize the opportunity presented by retail media is leading to a multitude of approaches. Layer on top of that the fact that brands are both selling goods and advertising through retailers, and it’s clear the landscape is being reshaped.
A recent report from the Association of National Advertisers uncovered the areas where fault lines may emerge under the surface:
- Reluctant buyers: 88% believe they are somewhat or heavily influenced by retailers to buy advertising on retail media networks.
- A multitude of players: 56% said they are currently working with five or more different retail media networks.
- Differing goals: Two-thirds of respondents see driving conversion as the most important investment. Only 12% indicated the most important objective was “to invest for future brand growth,” and 7% cited “to drive awareness.”
The results underscore key areas where relationships between brands and retailers can be strengthened.
Sales vs. growth. Retail media must be able to drive both conversions of a single sale in the lower funnel, and brand equity growth in the mid- to upper-funnel.
As one respondent put it, "The jury is still out on if the RMNs are truly driving sales incrementality."
This also has implications for how a brand is budgeting retail media. Some brands are shifting dollars from shopper marketing, brand marketing, and trade spending, which could put the emphasis on short-term sales. But as another respondent put it, "There is concern that while attribution shows RMNs are driving brand sales, they are not necessarily driving brand growth. This is especially concerning where incremental RMN spending is being sourced from brand building budgets."
Standard measurement. Brands want to see an improvement in transparency in measurement. They also want results to be measured in the same ways across platforms. Further, brands believe retail media networks are not fully optimized for their KPIs.
This all leaves room for retailers to show they truly understand what brands are seeking from retail media, and show how they are delivering, all while reducing complexity.
As the report put it, “The next phase of growth for RMNs and value creation for brands will be through RMNs assuming shared responsibility with advertisers for driving brand growth, and demonstrating the ability of their platforms to drive incrementality and positive ROAS for brands. In other words, the next stage of growth will be driven by results versus relationships.”