By Annie Gasparro
Grocery sales boomed throughout the pandemic. One of
supermarkets' biggest and least-known suppliers missed out.
TreeHouse Foods Inc., based in Oak Brook, Ill., is the nation's
largest manufacturer of store-brand foods. Its low prices and
variety helped make it a growing threat to packaged-food giants
such as Kraft Heinz Co., General Mills Inc. and Kellogg Co. over
the past decade.
When Covid-19 disrupted the U.S. food sector, however,
TreeHouse's strengths became liabilities, the company's top
executives said, preventing it from benefiting as much as other
grocery suppliers during the pandemic. Over the past year,
TreeHouse ran into more capacity constraints and supply-chain
problems than well-known brands because of coronavirus outbreaks.
Cost cuts had to be delayed while labor, packaging, ingredients and
freight got pricier. Not prepared to market its products online,
TreeHouse fell behind as more consumers took their grocery shopping
to e-commerce platforms.
"We had built this supply chain designed for tremendous
efficiency but very low volatility," TreeHouse Chief Executive
Steve Oakland said in an interview. "When the pandemic hit, we had
complexity meet volatility."
The company faces pressure from an activist investor. Mr.
Oakland said he is investing in technology and slimming down the
company's unwieldy operations, aiming to reverse TreeHouse's
fortunes as the pandemic eases.
TreeHouse makes 30 kinds of food for dozens of retailers, sold
under store brands like Walmart Inc.'s Great Value macaroni and
cheese and Whole Foods' 365 Everyday Value organic ground coffee.
Those supermarket giants, and others such as Kroger Co., Albertsons
Cos. and Costco Wholesale Corp., in recent years have invested
heavily in such store brands, saying higher-quality and unique
store-branded products help recruit shoppers and keep them coming
back. They are also more profitable for retailers.
Grocery stores typically don't operate their own factories,
relying instead on TreeHouse and other third parties to make items.
For years, the formula worked: Heading into the pandemic, sales of
store-branded goods grew at twice the rate of name-brand products,
helped by grocery chains' push to sell more of them, and improve
the chains' own profit margins.
Covid-19 changed all that. Stay-at-home orders and restaurant
closures shifted the bulk of consumers' food shopping toward
grocery stores. National brands, like Kraft Heinz, General Mills
and Kellogg, quickly enlisted third-party factories to make more of
their products and help meet higher demand. In their own plants,
they stopped making certain products to maximize bestsellers and
keep manufacturing lines moving.
TreeHouse couldn't do either. The company, Mr. Oakland said,
makes a fraction of the dozens of flavors and sizes that national
brands do, so there were fewer options to cut back in order to gain
efficiency. The cuts made by TreeHouse cost it market share.
In frozen waffles, TreeHouse temporarily cut flavored ones, like
chocolate chip, to focus on making the basics. The leading brand,
Kellogg's Eggo, suspended production of more obscure varieties and
continued selling popular flavors like chocolate chip. TreeHouse's
frozen-waffle sales took a hit as a result, Mr. Oakland said.
TreeHouse also couldn't hire third-party manufacturers to
increase production because it was too expensive and complicated,
given the many retailers TreeHouse serves, former TreeHouse
"Private label lost share in many, many categories, and that is
good news for big brands," Kraft Heinz Chief Executive Miguel
Patricio said in a February interview. "That's something we don't
see vanishing when the pandemic is over."
The greater availability of national food brands during the
pandemic helped them win more shelf space from private-label
products, Mr. Patricio said.
TreeHouse's branded rivals also got a boost as consumers' shift
to online grocery shopping generated a decade's worth of e-commerce
sales in a single year, according to private-label consulting firm
Price comparisons -- where private-label foods often win
consumers when set side by side on shelves next to more expensive
branded products -- can be harder for consumers to do online, said
Daymon's senior vice president of strategy advisory, Aimee
Private brands' share of grocery sales inched down last year to
about 18% of sales -- ending a decadelong rising streak, according
to market research firm Nielsen. TreeHouse lost share in cereals,
cookies and other categories.
In 2020, TreeHouse's overall comparable sales rose 2.7%, behind
other grocery players like Kraft Heinz, where revenue by that
measure increased 6.5%, and Albertsons, up about 12%.
Pandemic-driven challenges added to problems TreeHouse already
faced from acquisitions that executives said overwhelmed its
operations, and pressure from retailers to improve quality and
Mr. Oakland said he has already simplified TreeHouse's
operations. The company stopped making 11,000 items, got rid of 11
factories and sold off some businesses.
Activist investor Jana Partners, which disclosed a 7.5% stake in
TreeHouse earlier this year, said it is encouraged by the steps the
company has been taking. The New York-based investment firm is
pushing TreeHouse to improve shareholder value, in part by
considering a sale of the company, according to a regulatory
TreeHouse said it can boost its valuation by being nimbler. The
company is buying new packaging equipment that is easier to modify
and developing artificial intelligence to improve order
Mr. Oakland plans to cut costs throughout the company to help
pay for that, and he said he remains confident that private-label
products will find favor again as consumers resume normal shopping
and eating out. Stimulus checks, he said, allowed people to
temporarily splurge on name brands.
"In times of uncertainty, people went to brands," Mr. Oakland
said. When the pandemic ends, "private label will get its
Write to Annie Gasparro at email@example.com
(END) Dow Jones Newswires
April 18, 2021 11:14 ET (15:14 GMT)
Copyright (c) 2021 Dow Jones & Company, Inc.