Smucker sees opportunity in diverse coffee category

by Jeff Gelski
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Folgers coffee, Smucker
Sales volume for Smucker's Folgers brand dipped again in the second quarter.
 

ORRVILLE, OHIO — The complexity of the U.S. retail coffee category has brought along more opportunity for sales growth as well as more problems to solve. A case in point is the performance of the J.M. Smucker Co. in the second quarter ended Oct. 31.

Steven Oakland, J.M. Smucker Co.
Steven Oakland, president of U.S. Food and Beverage for Smucker

“The breadth and reach and size of the coffee category, the fun part about it is there are a whole bunch of needs,” said Steven T. Oakland, president of U.S. Food and Beverage for Smucker, in a Nov. 16 earnings call. “It's fragmented. It's not as simple as it was 10 years ago that you could solve (issues with) Folgers roast and ground.”

Sales volume for the company’s Folgers brand, more of a value brand, dipped again in the second quarter, but more premium coffee brands fared better. Sales for the Dunkin’ Donuts brand increased 17%, reflecting double-digit growth for both roast and ground and K-Cup offerings, said Mark R. Belgya, chief financial officer. Café Bustelo net sales increased 4%.

Dunkin' Donuts K-Cups coffee, Smucker
Sales for the Dunkin’ Donuts brand increased 17%, reflecting double-digit growth for both roast and ground and K-Cup offerings.
 

More people buying home brewing machines may increase K-Cup sales, Mr. Oakland said. He said some retailers are promoting new home coffee brewers for under $50.

“I think certainly it’s fair to assume that this lower price-point machine will bring new consumers into the market place,” he said.

Smucker has an opportunity to as much as double its K-Cup business over time, Mr. Oakland said.

“So for us to make that ambition of doubling our K-Cup business, we will need to add s.k.u.s (stock-keeping units),” he said. “We will need to add brands, and we’ll need to add distribution, and I think you’ll hopefully start to see us do that.” 

Cafe Bustelo coffee, Smucker
Over the next several years, Smucker could potentially could double the Café Bustelo business.
 

Mr. Belgya added Smucker over the next several years potentially could double the Café Bustelo business, which is about $150 million in annual sales now.

Segment sales in Smucker’s U.S. Retail Coffee segment increased 0.2% to $552.7 million from $551.8 million in the previous year’s second quarter, reflecting a slight increase in net price realization. Gains for the Dunkin’ Donuts and Café Bustelo brands mostly offset lower volume/mix for the Folgers brand. Folgers volume was down 6% in the quarter, which was an improvement from a 13% decline in the first quarter. Second-quarter U.S. Retail Coffee segment profit decreased 18% to $152.6 million from $186.5 million, primarily due to higher green coffee costs and an unfavorable impact of volume/mix.

Mark Smucker
Mark Smucker, president and c.e.o. of Smucker

“With price investments made in advance of lower green coffee costs expected later in the fiscal year, the coffee segment profit decline was anticipated,” said Mark T. Smucker, president and chief executive officer of the J.M. Smucker Co. “These actions were necessary to protect competitive positioning in the near term as coffee profitability will improve significantly in the back half of the year. This includes a projected record fourth-quarter segment profit for coffee, primarily resulting from lower green coffee costs and cost-savings initiatives.”

E-commerce sales should continue to rise for coffee and other Smucker products. While coffee sales in the e-commerce channel increased over 150% in the second quarter, Jif peanut butter sales in the channel increased by over 75%.

Jif E-Commerce, Smucker
Jif peanut butter sales in the e-commerce channel increased by over 75%.
 

“These represent some of the fastest-growing categories in e-commerce as they are well suited for a subscription model,” Mr. Smucker said. “The channel is still relatively small with just over 2% of our U.S. Retail sales coming from e-commerce in the second quarter. However, we are confident this will increase to at least 5% of net sales by fiscal 2020.”

Companywide in the second quarter, Orrville-based Smucker reported net income of $194.6 million, or $1.71 per share on the common stock, which was up 10% from $177.3 million, or $1.52 per share, in the previous year’s second quarter. Net sales of $1,923.6 million were up 1% from $1,913.9 million.

“Our ongoing efforts to position our business for growth began to pay off this quarter,” Mr. Smucker said. “We achieved modest sales growth driven by key brands in every business and delivered earnings per share ahead of expectations.”

Pillsbury and Crisco, Smucker
Pillsbury and Crisco struggled during the quarter.
 

In the company’s U.S. Retail Consumer Foods segment, net sales of $531.5 million were down 5% from $557.3 million in the previous year’s second quarter. Sales for the Crisco and Pillsbury brands each declined 20% in the quarter, Mr. Belgya said. Volume/mix reduced net sales by 9 percentage points, primarily driven by the Crisco and Pillsbury brands. Net price realization increased net sales by 4 percentage points, primarily attributed to the Jif and Smucker’s brands. Segment profit increased 10% to $130.9 million from $118.9 million due to improved net pricing and reduced marketing expense, partially offset by lower/volume mix.

In the International and Away From Home segment, net sales were up 5% to $287.3 million from $273.8 million while segment profit was up 4% to $53.7 million from $51.7 million. Contributions from favorable volume/mix and foreign currency exchange were offset partially by expenses related to the construction of the Smucker’s Uncrustables production facility in Longmont, Colo.

“When complete in fiscal 2020, we will have the capacity to double net sales (for Uncrustables) from the $250 million level we project for the current fiscal year,” Mr. Smucker said.

Smucker's Uncrustables
Smucker has begun constructing a Smucker's Uncrustabled production facility in Longmont, Colo.
 

In the U.S. Retail Pet Foods segment, segment net sales increased 4% to $552.1 million from $531 million and segment profit increased 7% to $122.9 million from $114.5 million.

For the six months ended Oct. 31, Smucker companywide posted net income of $321.4 million, or $2.83 per share on the common stock, which was down 7% from $347.3 million, or $2.98 per share, during the same time of the previous year. Six-month net sales of $3,672.5 million were down 2% from $3,729.7 million. Smucker gave a full-year outlook of adjusted earnings per share of $7.75 to $7.90, which compared to a previous outlook of $7.75 to $7.95. 
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