Annie's building up snacks business

by Eric Schroeder
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BERKELEY, CALIF. — Operating behind the belief that its snack business is at “a really key inflection point,” natural and organic food maker Annie’s, Inc. announced it has agreed to acquire a snack manufacturing plant in Joplin, Mo., from Safeway Inc. and Safeway Australia Holdings, Inc. for $6 million plus the cost of inventory and supplies. The plant has been Annie’s primary manufacturer of cookie and cracker products since the inception of the company’s snacks business in 2002. Products made at the plant account for more than 50% of Annie’s overall snacks net sales and represent the majority of the plant’s total production volume.

“This acquisition is an attractive business opportunity that will help us go after the significant untapped growth and profit potential in our snack business,” John Foraker, chief executive officer, said during a Nov. 7 conference call with analysts to discuss second-quarter results. “The Joplin plant provides capacity to more than triple our current cookie and cracker production volume and will allow us to grow faster and more profitably than we otherwise could.

“As we grow our overall volumes, we expect our product line margins to benefit from fixed cost leverage, providing fuel for future growth. The plant will also serve as a platform for further innovation in snacks as it has existing capabilities in a number of close-in areas for potential expansion.”

Mr. Foraker said the majority of Annie’s cookie and cracker products are produced at the plant. The exception is gluten-free items, which he said are produced elsewhere. The company has no plans to add gluten-free capabilities in Joplin, he added.

Mr. Foraker said snacks have been an important contributor to Annie’s recent sales growth, but the company believes it has “only scratched the surface” of its potential in this part of the business.

“To provide some context, in the grocery channel, the category leader in mac and cheese is about 10 times our size while the category leader in crackers is over 40 times our size,” he explained. “We know that consumers love our Cheddar Bunnies and Bunny Graham snack offerings. We see significant opportunities to broaden our product offering and to expand and improve our mainline distribution much like we are successfully doing in the mac and cheese category.”

As Annie’s looks to expand its snacks business Mr. Foraker said the company has been proactive in its innovation efforts. Since its inception more than 10 years ago, Annie’s has relied on cardboard boxes in different sizes to sell its products, but during the second quarter the company tested a smaller bag format for its products. Initial response has been positive, he said.

“This packaging is strongly preferred by consumers and proves our price point competitiveness at shelf, and offers potential for significant increases in mainstream distribution and breadth of assortments,” he said. “The results well exceeded our benchmark and, as a result, we intend to expand this program significantly over the next year.”

Asked by an analyst whether Annie’s is concerned about cannibalization the new packaging may have on existing products, Mr. Foraker responded that the low levels of distribution on its base cookie and cracker business in mainstream channels make it unlikely.

“To the extent there is risk in other places, we are going to manage the channels very carefully to make sure we mitigate that,” he said. “But we think that the upside in terms of higher volumes, unit velocity, the ability to build better loyalty and repeat with our core consumers is just extremely significant, and it is a real big breakthrough for us. And we are really excited that it is coming at the same time that we are leveraging our capabilities on the manufacturing side with Joplin to really line the whole thing up to be a much bigger growth and profit algorithm in the future.”

Net income at Annie’s in the second quarter ended Sept. 30 was $5,552,000, equal to 33c per share on the common stock, up 47% from $3,785,000, or 22c per share, in the same period a year ago. Net sales totaled $58,650,000, up 26% from $46,686,000.
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