Industry is hit with demands from retailers seeking to draw in
shoppers
By Annie Gasparro, Sarah Nassauer and Heather Haddon
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (September 1, 2017).
America's packaged-food companies are coming under pressure from
retailers who are pushing big brands to lower their prices.
On Thursday, Campbell Soup Co. said its sales would suffer this
winter because it failed to reach an agreement with a major
retailer over promotional pricing and shelf space for its canned
soup, its most important product. The unsuccessful negotiations
were with Wal-Mart Stores Inc., according to people familiar with
the situation. Wal-Mart comprises about 20% of Campbell's annual
sales.
Grocery giants, including Wal-Mart and Target Corp., as well as
smaller chains such as Sprouts Farmers Market Inc. are vying to
find ways to attract shoppers amid intensifying competition.
Amazon.com Inc.'s deeper push into the grocery business with its
acquisition of Whole Foods Market Inc. is the latest entrant into
an already crowded sector.
Packaged-food companies have been struggling with declining
sales for years as shoppers move away from older brands and toward
food options perceived as fresher and healthier. Now retailers are
adding to the packaged-food companies' woes.
"The retailer landscape is changing dramatically," Campbell
Chief Executive Denise Morrison told analysts on Thursday as the
company reported its 11th straight quarter of falling sales.
Campbell said negotiations for promotions with retailers involve
decisions on pricing, product assortment and other factors, but the
company declined to provide details of its recent issue. Campbell's
shares fell nearly 7% on Thursday, the biggest loser in the S&P
500 index.
Wal-Mart is pushing hard to lower prices to compete. Executives
at the world's largest retailer by revenue have told suppliers that
its prices should be 15% lower than competitors' 80% of the time.
At the same time, Wal-Mart is spending billions to drop prices
strategically on certain products, eating into its own margins to
lower prices, sometimes without telling brands in advance,
according to managers at large consumer-goods companies that sell
through Wal-Mart. When one retailer drops prices, that can
challenge brands because other retailers will ask suppliers to
match.
Kroger Co., the largest traditional grocer in the U.S., is
scheduled to report earnings next week, likely providing additional
insight into the tug of war between retailers and brands.
Disagreements over the terms of in-store promotions are common
but become heightened when retailers are feeling squeezed, and they
can be particularly tough in a struggling category like canned
soup, said Mathis Martines, vice president of brand and strategy
for the Concentric consultancy. "You are seeing the degradation of
some of these larger, mature brands," he said.
Hain Celestial Group Inc.'s chief executive, Irwin Simon, said
Tuesday that retailers of all kinds are asking for reduced prices.
His company, which sells BluePrint refrigerated juice and Terra
vegetable chips, reported better-than-expected sales, but he said:
"Everyone wants to sell more; everyone wants to cut prices."
Warren Buffett, an investor and board member of Campbell's rival
Kraft Heinz Co., said Wednesday that the struggle between brands
and retailers has been going for decades, but as grocers such as
Wal-Mart, Costco Wholesale Corp. and Amazon get stronger, brands
have less power to negotiate. "Right now, the retailers, they're
doing better in this round of the fight," he said in an interview
with CNBC.
General Mills Inc., Kellogg Co. and Kraft Heinz say that about
one-fifth of their annual sales come from Wal-Mart, giving the
retail giant leverage over the biggest food makers in the country.
General Mills, which could benefit from Campbell's loss with its
rival Progresso soup brand, declined to comment, as did Kraft Heinz
Co. Kellogg didn't immediately comment.
Amazon, which completed its acquisition of Whole Foods on
Monday, immediately lowered prices on items such as baby kale and
bananas in stores and made more items available online. European
discount chains such as Aldi and Lidl are becoming more popular in
the U.S., cutting into mainstream grocery sales, by offering lower
prices.
Campbell's Ms. Morrison said the industry will remain
"hypercompetitive" for the foreseeable future, affected by
alternatives to grocery stores such as online shopping with
Amazon.com Inc.'s acquisition of Whole Foods and meal-kit services
such as Blue Apron Holdings Inc.
Campbell is trying to diversify, buying brands such as Pacific
Foods organic soup and Bolthouse Farms refrigerated juice. But
mainstays such as Pepperidge Farm Goldfish crackers, V8 juice and
SpaghettiOs still make up about 85% of Campbell's $1.67 billion in
quarterly sales.
Campbell's sales slid 1.4% in the quarter ended July 30, and its
adjusted earnings per share were 52 cents, below analysts'
expectations. The company cut costs in the quarter, with adjusted
marketing and promotional expenses down 12%.
At J.M. Smucker Co., which sells Jif peanut butter and Folgers
coffee among other brands, price is a key factor for retailers now,
Chief Mark Smucker said last week following its earnings. "They are
competing, they're trying to find points of difference. Obviously,
price to them is one of those."
Sprouts, a natural-food chain that rivals Whole Foods, said it
was forced into cutting prices and offering more promotional deals
in the recent quarter because of competition. "It's heavy ad and
in-store promotions," said Brad Lukow, chief financial officer at
Sprouts, during earnings in August.
Smart & Final Stores, Inc., a California warehouse-format
grocer, said it has increased its mailed fliers on markdowns of key
items, given the competition.
Discounts and promotions like buy-one-get-one-free deals are
crucial for sales growth, particularly in categories that aren't
expanding, such as cereal and frozen meals. About 40% of cereal
boxes and 33% of frozen meals are sold on a promotion, according to
Nielsen.
Bob Goldin, a partner at food industry consultancy Pentallect
Inc., said the heavy promotional environment is "an intractable
problem" in retail. "Constant discounting depresses everyone's
margins; it also trains consumers only to shop on deal," he
said.
Campbell, and other brands, can push back, but retailers have
the upper hand because they control the shelf space, Mr. Goldin
said.
Paul Ziobro contributed to this article.
Write to Annie Gasparro at annie.gasparro@wsj.com, Sarah
Nassauer at sarah.nassauer@wsj.com and Heather Haddon at
heather.haddon@wsj.com
(END) Dow Jones Newswires
September 01, 2017 02:47 ET (06:47 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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