CHICAGO — The history of ConAgra Foods, Inc. parallels the continuum of modern agriculture, starting with a focus on the buying, selling and processing of commodities and ending as a product on the shelf with strong brand equity. The name ConAgra is the merging of the company’s predecessor Consolidated Mills and the word agriculture. The company changed its name in 1971 to ConAgra Foods from Nebraska Consolidated Mills to emphasize its shift away from the buying and selling of commodities to the production and marketing of finished products. And, today, once the separation from Lamb Weston is complete, the company will be known as Conagra Brands, with the emphasis on its stable of No. 1 and No. 2 brands in categories throughout retail stores.
Once the dust settles from the separation, Conagra Brands will stand as a company with approximately $8 billion in annual sales. The new iteration will feature four business units, with Grocery & Snacks making up 41% of sales, Refrigerated & Frozen (35%), Foodservice (14%) and International (10%). Branded products will represent 91% of sales, hence the emphasis on the second part of the new name.
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| Sean Connolly, president and c.e.o. of Conagra Brands |
“You’ve known about ConAgra for a long time,” said Sean Connolly, president and chief executive officer, on Oct. 18 during a meeting with financial analysts to outline the company’s business plan post separation. “This is a different animal, and there is potential here, and we are going to be able to unlock it because we are a pure play for the first time.
“This is a totally new era. We are not the ag business that we started as 100 years ago, or almost 100 years ago. We are certainly not the global conglomerate that we’ve been for decades. For the first time in our history, we will be a branded C.P.G. pure play largely focused in North America, and we are incredibly excited about what that means and the focus that will bring.”
To clarify the Conagra Brands mission, Mr. Connolly focused on trends that have occurred in consumer packaged goods. He noted scale was once a source of competitive advantage that allowed the largest companies to attract the best talent.
“But if one were truly objective about our industry over the years, one could argue that the clear benefits of being a big C.P.G. have become less obvious, that instead what you’ve seen in a lot of cases are aging C.P.G.s where excess complexity has crept in … that has eroded clarity in terms of how to go to market and create value and that has enabled indecisiveness amongst employees or maybe bad decision-making.
“And if you are truly objective about it, underpinning this dynamic in a lot of cases was a culture that was very bureaucratic, internally-focused and political. And if you think about talent and the goal of winning the war for talent, it’s awfully hard to attract or retain the best talent in the industry with that dynamic.”
Future success for the company involves “breaking from some bad habits,” Mr. Connolly said. Most notably, Conagra’s management is shifting its focus from volume to value creation; moving from what he called undisciplined innovation efforts to a more disciplined innovation program; and replacing “erratic” advertising and promotion efforts to focused and consistent advertising and promotion.
In fiscal year 2015, Conagra’s adjusted operating margin was 11.6% and compared unfavorably to the industry average of 16%.
“ … Those legacy practices did us no favors,” Mr. Connolly said. “Not only did it train our consumer base to wait for a deal to buy on a deep discount, but it also contributed to margins that meaningfully lag our peers. In other words, a lot of this margin gap is self-inflicted, and we can do something about that because as our practices change, our margins can improve and you are already seeing that.”
Value creation will involve broadening the market for many of the company’s brands. Hunt’s tomato, Mr. Connolly said, is adding on-trend attributes like now being made with raw materials that are not genetically modified.
“And Slim Jim, which is a phenomenal business, but we have young men that outgrow it,” he said. “Slim Jim needs to grow up.”
Going forward, Conagra’s management team will have five priorities — portfolio segmentation so the company may allocate resources properly; the development of insights that translate into brand-building and innovation; aggressive LEAN execution; integrated margin management; and mergers and acquisitions.
Priorities for the company in fiscal 2017 will involve transforming the Banquet brand.
“ … We are liberating a nearly $1 billion brand from a $1 price point where it has been for a long, long time,” Mr. Connolly said. “We are not just doing it by raising the price. We are improving the quality, and we are updating the packaging. We are supporting it with advertising, not trade dealing, but it’s a major transformation, and we’ve got some consumers in the base of that business that are switchers that are moving on.”
Conagra also is undergoing a period of stock-keeping unit (s.k.u.) rationalization, because “we have a long tail of s.k.u.s that add up to a small amount of our volume and we are letting some of that business go,” Mr. Connolly said.
On mergers and acquisitions, Mr. Connolly said the company will put them in two buckets: modernizing acquisitions, which tend to be smaller bolt-on efforts, and synergistic acquisitions, which tend to be larger.
“ … We want strong brands; we don’t want somebody else’s problems,” he said. “We will look to leverage Conagra capabilities or add potentially new capabilities, but ultimately we want to increase scale with customers because good things happen with scale. Financial fit, attractive top line is always nice. Certainly margin accretive is nice, but the bottom line is it has to deliver a strong financial return.”
He added that the company is not opposed to divestitures for businesses that don’t fit the new Conagra model; that may have a more limited coherence with the company’s objectives.
Once the spin-off with Lamb Weston is complete, Mr. Connolly said the company will focus on improving top-line trends while continuing to expand margins.
“ … Then we will look to accelerate growth while again continuing to expand our margins,” he said. “The constant here across this continuum is margin expansion, continuing to chip away at the gross margin gap and that is a centerpiece of our game plan while we improve quality growth.
“So when you put it all together, it adds up to a fairly robust financial algorithm. What you should expect from us in terms of our growth CAGR is 1% to 2% through 2020, and as you think about gross margin, we are looking to chip away at about 60 basis points per year, and that will translate to an operating profit CAGR of 4% to 5%. We will buy back shares and when you put all that together, that will translate to an e.p.s. CAGR of about 10%. (It) all adds up to a total shareholder return in the ballpark of 12%, clearly a compelling place to put your money.”
