Campbell: Price Hikes, Competition Contribute To 3Q Soup Slip

can o soupsPrice increases led to pushback from consumers and retailers, contributing to soft soup performance in third-quarter fiscal '08, Campbell Soup Company executives acknowledged during Monday's results announcement.

President/CEO Douglas R. Conant stressed that the rest of Campbell's portfolio performed very strongly, that the company continues to expect an extremely strong fourth quarter, and that it continues to project year-end net-earnings-per-share growth of between 5% and 7% against a fiscal '07 adjusted base of $1.95.

Indeed, overall net earnings for the third quarter (partly reflecting a gain from the sale of the Godiva business) were $532 million--or $1.40 per share--compared to $217 million, or $0.55 per share, in last year's third quarter. However, cost inflation drove gross margin down to 38.6%, from 39.9%.



Year-to-date, net earnings were $1.076 billion, or $2.79 per share, compared to $793 million, or $1.99 per share, in the first nine months of fiscal 2007. Gross margin dipped to 39.9%, from 41%.

Still, Conant admitted that, after three years in a row of growth, U.S. soup "took a step backward" in the quarter ending April 27.

Sales of condensed soups were flat, although Healthy Request saw gains. Worse, ready-to-serve sales dipped by 9%. Campbell's Select and Campbell's Chunky were down, as were microwavable bowls (offsetting gains for the Soup at Hand convenience cups line). A significant bright spot was reduced-sodium varieties, which continued to gain sales and share of sales.

Campbell began raising soup prices in February in an effort to maintain margins in the face of rising costs. While some consumer resistance was expected, the company "miscalled" the severity of the current impact of inflation on consumers--meaning that pricing proved too aggressive. (Chunky promotional prices went from four cans for $5 a year ago to four cans for $6, for instance.)

Conant described the quarter as "one of the most inflationary and volatile" he had seen during his long career in the food business.

The pricing put Campbell at a disadvantage with lower-priced competitors, and the company also ran up against "the buzz saw of retailers not giving you the highest quality of merchandising," added CFO Robert A. Schiffner. (Campbell is adjusting its pricing strategy, and won't raise prices again during this fiscal year, relying on productivity gains to offset rising costs.)

Schiffner also pointed out that U.S. soup had a lot to live up to: Sales were up by 10% during the comparable period last fiscal year.

All of that said, emphasizing that a focus on innovation and differentiation are the keys to Campbell's growth, Conant maintained that the recent decline in ready-to-serve soup has been less a factor of pricing than a lack of innovation. "Quite frankly, we haven't done a very good job of that this year," he said.

However, he said that soups will be back on track next year, starting with the introductions of Select Harvest and V8 soup lines during this year's fourth quarter. The reduced-sodium Select Harvest line will include 36 ready-to-serve varieties, plus reformulations of 12 kids' condensed favorites. Campbell's V8 varieties are rich in vegetables, low in fat and cholesterol, and contain no artificial flavors or preservatives.

Referring to this year's fourth quarter, Conant said he's "never been more confident about [Campbell's] ability to grow sales," both in soup and other categories. "We hitting all of the cylinders in the rest of our portfolio," he said, adding that he is "bullish" about 2009.

Other third-quartetr results highlights:

  • Swanson broth sales increased 5% due to growing consumer demand for broths in aseptic ("juice box") packages.
  • Beverage sales increased by double digits due to growth in V8 V-Fusion juice (new varieties were introduced), although V8 vegetable juice sales declined slightly.
  • Pepperidge Farm saw double-digit sales growth, with across-the-board gains in cookies, crackers, bakery and frozen. Cracker sales were driven by Goldfish and the launch of Baked Naturals, a line of adult snack crackers, in selected markets.
  • Prego pasta sauce sales were flat, and sales of Pace Mexican sauces decreased slightly.
  • International soup, sauces and beverages grew 17%, to $400 million, in part aided by currency exchange rates. Russia and China are growing markets for Campbell.
  • Campbell's North American food service business grew by 6%, to $167 million.
Next story loading loading..