Product innovation, prices may boost TreeHouse

by Jeff Gelski
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BOSTON — Product innovation, the multiple price points of store brands and expansion opportunity in food away from home all may boost the private label category and TreeHouse Foods, Inc., Oak Brook, Ill., according to comments from TreeHouse Foods executives at the Barclays Capital Back to School Consumer Conference on Sept. 8 in Boston.

“More than 7 out of 10 of our customers have developed brands that have different price points, different consumer propositions that they own and that they want to merchandise in order to differentiate themselves from the next grocer down the street,” said Sam Reed, chairman and chief executive officer.

Previously, fewer than half of TreeHouse customers had such multiple tiers, he said. Now, organic and natural foods are becoming more prevalent among private label brands. While the company differentiates among product categories, TreeHouse Foods now also differentiates between customers and classes of trade, he said.

“We are getting to that point and should reach it in the next year or so where private label consumer brands, the innovation there is roughly proportionate to its share of the market place,” he said. “And it’s that innovation, ... coupled with the growth opportunities outside of traditional supermarkets, that in fact is the fuel that will power the growth opportunities for our industry and the sustained superior performance of TreeHouse Foods.”

Opportunity exists in dry dinners, such as macaroni and cheese and skillet dinners, said David Vermylen, senior adviser for TreeHouse Foods.

“We love the category because it’s a big, growing category with one big national brand, Kraft, who invests a lot of money in innovation,” he said. “After that, it comes to private label.”

TreeHouse Foods in 2010 acquired S.T. Specialty Foods, Brooklyn Park, Minn., which produces private label macaroni and cheese, skillet dinners, and other value-added side dishes and salads. TreeHouse is expanding an S.T. Specialty Foods plant and adding a line for macaroni and cheese cups that should be up and running this December, Mr. Vermylen said. TreeHouse also plans to expand S.T. Specialty Foods into the category of food away from home.

“And clearly, a big opportunity is expanding their base beyond principally being macaroni and cheese and moving into the skillet dinners, more of the pasta salads, rice mixes, etc.,” Mr. Vermylen said.

Private label has gained a larger share in the salad dressing category thanks to product innovation, said Dennis Riordan, chief financial officer of TreeHouse Foods.

“We have been a key beneficiary of that or, in fact, a driver of that growth because we are now able to offer our customers everything from organic to yogurt-based to light spritzers, all different types of salad dressing products that our R.&D. people are able to work with our customers, come up with those unique products,” he said.

He added TreeHouse Foods plans $85 million in capital expenditures this year as compared to about $65 million in 2010 thanks in part to tax incentives.

“We’re going to take advantage of really relatively inexpensive money and tax incentives,” he said. “So this was the year to build upon our CapEx. On a go forward basis, it won’t be quite at that level.”

TreeHouse Foods is coming off a second quarter ended June 30 in which it had net income of $14.3 million, or 39c per share, which compared with $21.7 million, or 60c per share, in the previous year’s second quarter.

Mr. Riordan said the gross profit line may affect net income more for private label companies than for branded companies, which may have the option of cutting back on expenses in other areas such as marketing funds and promotion funds.

“Unfortunately, in private label, we don’t have promotion budgets and funds,” he said. “We don’t have advertising and co-op funds. . . . So, (when) we miss at the gross profit line, it goes straight to the bottom line.”

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