Hormel introducing itself to natural, organic consumers

by Keith Nunes
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Applegate's unique supply chain is a key attraction for Hormel Foods.

AUSTIN, MINN. — Much like General Mills intends to do with its acquisition of Annie’s, Hormel Foods is extending its reach into the burgeoning natural and organic segment and seeking to increase its appeal to the very passionate and engaged consumer base with the proposed acquisition of Applegate Farms, Bridgewater, N.J.

“The Applegate brand brings even more diversification to our balanced model through additional channels, a new consumer set, and a different supply chain model,” said Jeffrey M. Ettinger, chairman and chief executive officer of Hormel Foods, in a conference call with financial analysts on May 27.

The purchase price for Applegate will be approximately $775 million. The company is expected to generate approximately $340 million in 2015, according to Hormel Foods.

For the purchase price, Hormel Foods is getting an established brand that has a product mix of 70% natural and 30% organic processed meat and poultry products, and an established supply chain in a very unique product category.

M. Ettinger, chairman and c.e.o. of Hormel Foods.

In the conference call with financial analysts on May 27, Mr. Ettinger noted synergies between the two companies may not be readily apparent given the uniqueness of Applegate’s supply chain.

“… More and more consumers, especially younger consumers, are gravitating toward wanting natural and organic items,” he said. “If you wanted to be ultimately a player or a purveyor of those types of items toward the broad set of consumers, you have to figure out a way to get into the space. Your choices then are can you build it yourself, or can you team up with somebody who already has a head start? So that’s really what we’re doing here.

“It has a great growth trajectory already that we think we can continue going forward. Clearly, we believe that there will be some examples where our larger scale within the market may help with certain of the traditional customer base.

“There may be other channels such as food service, where we have a really excellent direct relationship with a lot of customers that has not been a focus traditionally to Applegate. So I do think ultimately, the synergies, if you will, will be more on the top line basis. And it will be in that realm of being able to continue to generate really superior market growth and strong margins.”

Yet despite all of the positives surrounding the deal, there are areas of concern, Mr. Ettinger said, most notably around a consistent supply of pork that meets Applegate’s standards.

There are areas of concern around a consistent supply of pork that meets Applegate’s standards.

“In terms of demand outstripping supply, I think that’s a fair statement in general,” he said. “I’ve seen that frankly in multiple categories beyond meat.

“So that’s the area we’ll be working on, both in the near term and the long term to see if we can generate additional sources of supply,” he said. “And clearly, with just a general added interest in antibiotic free and organic production, we do feel confident over time that there will be more and more farms that will be utilizing these practices.”

In the end, when discussing Hormel’s rationale for the proposed acquisition, Mr. Ettinger came back to Applegate’s core consumer.

“The consumers are voting with their wallets,” he said. “They are making the choice that these attributes and products, natural, organic and antibiotic free, are important … And it’s been steadily growing at a double-digit rate for a number of years … And so we think it’s important to be where they are. It so happens we are now able to do it with a leading brand that generates solid significant margins, and has an ability to continue growing.”
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