Packaged-Food Companies' Revamp Efforts Fall Short for Investors

By Annie Gasparro and Cara Lombardo Features Dow Jones Newswires

Trouble for packaged-food companies is deepening.

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Smaller companies such as J.M. Smucker Co. and Hormel Foods Corp. are the latest to face investor pressure as volatile commodity prices hurt margins and consumers gravitate away from the older brands that have anchored many established food-makers. Shares of the jam and Spam makers fell about 10% and 6%, respectively, on Thursday, dragging down the broader S&P 500.

Smucker said weak sales of Folgers coffee and Crisco shortening hurt earnings in its most recent quarter, leading it to lower its earnings forecast for the fiscal year. Chief Executive Mark Smucker said the company must more quickly overhaul those and other older brands to appeal to consumers gravitating toward upstart products they see as more healthy or sustainably produced.

"There are a lot more brands out there," he said.

Shares in Mondelez International Inc., Conagra Brands Inc. and Campbell Soup Co. also fell, extending losses this year for food makers wrestling with the big shift from mass-market brands to fresher and more natural offerings. Kraft Heinz Company and Kellogg Co., which both reported sales drops this month, also saw their shares drop. The S&P fell about 0.2% on Thursday to 2438.77.

The slump is also weighing on advertising companies that rely on huge marketing campaigns by big food and consumer-goods companies. Hormel said it spent $24 million on advertising in the latest quarter, less than half what it spent in that period a year ago. Shares in WPP PLC, the world's biggest advertising company, fell nearly 11% on Wednesday after it reported a significant slowdown in ad-buying.

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Like their larger rivals, Smucker and Hormel said they are removing artificial ingredients from older brands and adding more simpler, grab-and-go products and fresh meats. Smucker has also tried to bolster its peanut butter and natural pet food brands to offset falling demand for highly processed products like Pillsbury cake mix. But Mr. Smucker said Thursday that promoting new brands won't be enough to put his company on better footing if demand for legacy products continues to erode.

"We must also focus on larger, more significant platform innovations on some of our key and larger iconic brands," he said.

Smucker's results reinforced "just how hard it is for big food companies to sustain momentum in a hostile retailer and competitive environment," Bernstein analyst Alexia Howard said. Grocery stores have pushed big brands to lower their prices in recent months to avoid losing shoppers to discount chains.

Hormel said low grain and turkey prices put pressure on the meat company to cut prices on its Jennie-O turkey products. At the same time, Hormel said higher pork and beef costs had hurt margins and sales of other products.

"Commodity markets have been challenging to forecast," Chief Executive Jim Snee said. Other Hormel brands including Skippy peanut butter and Spam saw sales improve.

Some companies have looked to emerging markets to offset lackluster U.S. sales. Hormel said it would buy Brazilian sausage and salami maker Cidade do Sol for around $104 million. Brazil's economy has improved recently after several years of political turmoil and poor growth, which Hormel hopes will lead consumers there to buy more meat.

"Strategic international growth is important to Hormel Foods and South America has been of interest to us for several years," Mr. Snee said.

Another recent Hormel purchase, Muscle Milk-maker CytoSport hasn't panned out. Hormel's specialty food sales, including the Muscle Milk products, declined 7% in the most recent quarter. Mizuho Securities analyst Jeremy Scott said the 2014 deal was a cautionary tale of what can happen when traditional food companies pick the wrong brands in attempting to expand their product offerings.

"The ready-to-drink protein category has expanded significantly in terms of the number of competitors," Mr. Scott said. "You're seeing the protein angle everywhere."

Write to Annie Gasparro at annie.gasparro@wsj.com

(END) Dow Jones Newswires

August 24, 2017 16:45 ET (20:45 GMT)