Campbell baking, snack units positioned for growth

by Eric Schroeder
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NEW YORK — Because it accounts for about a quarter of company-wide sales and a slightly lower percentage of adjusted operating earnings, the baking and snacking segment at Campbell Soup Co., Camden, N.J., “may at times get overlooked,” said Doug Conant, president and chief executive officer of Campbell. But in remarks made at the Sanford C. Bernstein Strategic Decisions Conference held June 4 in New York, Mr. Conant spoke glowingly and at length about the company’s “superior growth opportunities” in baking and snacking.

Since 2004, Campbell’s baking and snacking unit has shown significant progress, with net sales in fiscal 2009 totaling $1.8 billion and adjusted operating earnings of $265 million, Mr. Conant said. Organic net sales have risen at a compound rate of growth of more than 4% during the past five years, while gross margin has increased by almost three percentage points to more than 30%.

“We increased marketing expense, we increased operating earnings by almost 10% annually, adding nearly $100 million over the five years, and we increased our operating margin by some four points to over 14%, while also significantly improving our return on invested capital,” he said.

Several common strategies have driven the success in the unit’s financial results.

First, Mr. Conant said Campbell focused on adding value to its product line at the right price points. Doing so has helped the company to attract new consumers, expand usage occasions and improve price realizations across the baking and snack segment.

“We did this through a combination of improved nutrition, convenient availability, a broader range of choices tailored to meet the changing taste of the some 60 million to 70 million households in the U.S. and Australia that buy Pepperidge Farm or Arnott’s products every year,” he said.

Second, during the past five years Campbell has accelerated growth in savory snacks by attracting new users from other snacks.

“Our focus on Goldfish was a driving factor in Pepperidge Farm, and in Arnott’s it was Shapes and Vitawheat crackers,” he said. “Over the five years, Campbell has added almost $200 million in net sales through our strong performance in savory crackers.”

Like many companies, Campbell also has worked to reduce manufacturing costs during the past several years. In doing so, Mr. Conant said the company also was able to improve some of its key operations parameters — such as safety record and consumer complaints — by 50%.

Fourth, Mr. Conant said Campbell has increased the collaboration between its two businesses.

“Perhaps the clearest example was the successful launch this year of Tim Tam cookies from Arnott’s into the U.S. under the Pepperidge Farm umbrella trademark,” he said.

The collaboration between Pepperidge and Arnott’s is only beginning, though. Mr. Conant said the two brands management teams are collaborating on a $4 million, two-year project to upgrade Campbell’s worldwide bakery manufacturing options, with robotics being a key element.

“Pepperidge Farm and Arnott’s combined now have the largest installed base of robots worldwide in the baking industry and may well be the overall leaders in baking technology,” Mr. Conant said. “Both businesses have collaborated in food sciences, especially in relation to flour and to continuously improving quality.” He added by October the two businesses will have completed their conversion to a common SAP platform, which will facilitate information sharing, improve productivity and enhance quality.

A final strategy key to growth over the past five years has been plant investment. Mr. Conant said about 25% of a total $315 million in capital was dedicated to capacity expansion projects in both Arnott’s and Pepperidge Farm. Another 35% went directly to productivity projects, with the balance for sustaining operations and modernizing facilities.

Delving deeper into the Pepperidge portfolio, Mr. Conant said Campbell has grown net sales at about 10% compound since acquiring the business in 1961.

“Our consumers view the parent Pepperidge Farm brand as a premium trademark that offers consistently high-quality products, made with superior baking processes and very importantly, worth paying more for,” he said. “Indeed, the percentage of consumers who believe Pepperidge is worth paying more for has increased from around 60% five years ago to over 90% today, testimony to our value addition strategy. And we have been able to leverage this quality to grow Pepperidge Farm consistently.”

Mr. Conant identified Pepperidge Farm Goldfish and Pepperidge Farm bread as two “standout examples of sustained high-quality execution” against the company’s strategy of balancing superior value with a focus on wellness, quality and convenience.

Health and wellness, excellence in merchandising, digital media and an active play campaign, and broadening the product’s appeal into adjacent categories have formed the backbone for growth in the Pepperidge Farm Goldfish line, Mr. Conant said. He added the company has several new product ideas under development for sustaining growth in the line, including broadening the product’s appeal as a sweet treat for children, entering new categories and another step up in the line’s nutritional profile.

Fresh bread, too, has proved a boon for Pepperidge. The brand’s premium bread is now a $700 million brand, with the biggest driver the launch of whole grain varieties in 2005, Mr. Conant said.

“Whole grain breads have clear premium credentials, and this innovation attracted a significant number of new consumers who were drawn to the inherent health and wellness benefits of whole grains,” he explained. “Bakery whole grain innovation was the catalyst in trading consumers up the price benefit ladder. Over the five years, we have sustained this growth with continuous innovation around the whole grain theme and introduced a number of new breads, including Double Fiber and Hearty Oatmeal.

“We also broadened whole grains to forms of bread other than sandwich, including bagels and dinner rolls. We’ve continued our strong record of product innovation with the recent introduction of a new and fast-growing form of whole grain bread, Pepperidge Farm 100 Calorie Delit Flats.

“Deli Flats are doing very well and we believe that thins rolls like these could be a $300 million category within a few years. I’m confident they will prove to be an excellent growth engine going forward for us as we extend the concept into new occasions and new forms.”

Artisan bread, a new segment for Pepperidge following the acquisition of Ecce Panis in 2009, also will continue to be a growth area for the company, Mr. Conant said. He indicated the company plans to launch two new frozen retail items in July under the Pepperidge Farm Stone Baked brand.

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