AUSTIN, MINN. – With pork belly costs at historically high levels, bringing home the bacon was a challenge for Hormel Foods Corp. during the third quarter.
The spike in swine spelled a 26% decline in operating profit for the company’s Refrigerated Foods segment, dragging down an otherwise positive quarter for Hormel, which reported a 2% increase in net income.
“As the quarter went on, the team had an opportunity to, particularly on the bacon side, price against what the new reality of what the cost situation is,” said Jeff Ettinger, president and chief executive officer, during an Aug. 22 earnings call with analysts. “Belly costs are still at historically very high levels, but they have moderated some from the peak. And we expect now, as they head out of the summer season, they should start to return to more normalized levels.”
To stand out in what the company called an “on-trend” category, Hormel leans on a value-add approach.
“By and large, if you are just talking about a pound of raw bacon, that is never a high-margin big moneymaker for the manufacturer,” Mr. Ettinger said. “There is a lot of competition within that category. That 1 lb of bacon is not particularly differentiated. … Now, flavored bacons like Pecanwood or Applewood, or precooked bacons, or bacons for a particular food service application — that can be a contributor to the kind of higher margins we are looking for.”
Efforts to diversify its portfolio, including the January purchase of the Skippy peanut butter brand, have made Hormel less vulnerable to such commodity fluctuations. Solid returns from Skippy contributed to a 25% increase in sales for the Grocery Products segment during the quarter. The company also is optimistic about its REV snack wrap platform, which rolled out during the quarter and has already generated between $4 million and $5 million in sales.
“…buying into a category like peanut butter that has a different raw material, like guacamole, like salsa — we think those things have helped us,” Mr. Ettinger said. “And then the more you develop products that are not, frankly, just a piece of meat but are a meal, that have other components, that are a REV wrap, etc., again your vulnerability to any one commodity moving on you becomes less.“So, I do think we have over time improved the portfolio in terms of its vulnerability to these kinds of things.”