J.M. Smucker Co (NYSE:SJM), the maker of Folgers coffee, said on Wednesday it made a "misstep" with its most recent price increase, which caused sales volumes to drop sharply as customers delayed purchases and shifted to cheaper private-label brands.
"Clearly, we do feel that it was a bit of a misstep," Mark Smucker, president of U.S. Retail Coffee for Smucker, told analysts on a conference call after the company released fiscal 2015 second-quarter earnings.
"When you look at how our promo prices moved going into August and September, that significant jump was somewhat unique to what we've done in the past and so the consumer did sort of experience some sticker shock."
In June, Smucker raised list prices on most of its U.S. packaged coffee by roughly 9 percent, primarily on Folgers and Dunkin' Donuts brands, for the first time in three years because a drought in top grower Brazil caused green coffee costs to soar. Kraft Foods Group Inc followed with a 10 percent price hike for Maxwell House and Yuban roast and ground brands.
Following price promotions already in place, this equated to a price increase of nearly 30 percent for Folgers in some markets, or an increase of $2 per cannister, a historically steep rise, said Vince Byrd, Smucker's president and chief operating officer.
"We believe this resulted in consumers temporarily delaying purchases within the mainstream segment and to a significantly lesser extent substituting private label," he said.
Byrd cited data from market research firm IRI showing volume in the overall mainstream segment fell 9 percent, with Smucker's brands down 13 percent during the latest 12-week period, whereas private-label rose 3 percent.
"Historically, what Smucker has been able to do is, if they see costs coming up or down, they can shift price first and expect everyone else to follow," Liang Feng, analyst for Morningstar, said earlier this week.
This is typical in an expanding category but the roast and ground coffee segment in the United States, which Smucker dominates with an estimated 50 percent share, is shrinking as consumers shift to the more convenient single-serve segment.
The widened price gap between Folgers and private label is temporary, another analyst said.
"It's just a timing lag. Prices are going to go up," the analyst said.
(By Marcy Nicholson; Editing by Matthew Lewis)