NEW YORK — Conservative consumers pressured by higher prices, the impact of tariffs and persistent inflation are all issues making it challenging for consumer packaged goods companies like Conagra Brands, Inc. to achieve top- and bottom-line growth. Sean Connolly, president and chief executive officer of Conagra Brands, discussed how his management team is trying to thread the needle when addressing the issues and trying to improve the company’s performance during a presentation at the Goldman Sachs Global Staples Forum.
He said the challenges Conagra Brands faces start with the consumer.
“… We sell to consumers in every aisle in the grocery store,” Connolly said. “And the simple way I think about it is uncertainty leads to conservatism. It’s fairly predictable. Granted, it’s different from what we saw two summers ago, where you saw household savings and things like that, stimulus money, coming down. But people were revenge spending, and they were going out and buying Taylor Swift and Beyoncé tickets at any price. That was atypical.
“What we’re seeing now is not atypical. When there is uncertainty, consumers of all income groups tend to be more conservative, and that’s what we’re seeing right now.”
A key focus for Conagra Brands has been increasing volume. Connolly said many large center-store CPG companies had volume declines peak at -7% to -8% and have been working to move volume sales back to zero and eventually into positive territory.
“I think everybody from retailers to manufacturers wants to see the consumer get back their typical behavior and wants to see volumes get robust again,” he said. “The phrase that we’ve all been chasing for a couple of years now is ‘on algo.’ When are you companies going to get — food companies going to get back on algo?
“And every time we think we’re getting close the new curveball comes our way.”
Connolly specifically was referring to tariffs and the persistence of inflation.
Dave Marberger, chief financial officer, said Conagra Brands’ greatest tariff exposure comes from tinplate and aluminum for packaging. Because there are few domestic alternative sources and suppliers can only give so much on their price means the company has to consider “targeted price increases.” But the fluidity of the tariff situation, where in some cases they are being raised and lowered frequently, is challenging.
“To the extent, though, that the estimated costs are changing, it makes it very difficult if you ultimately conclude that you want to talk to a customer about a targeted price increase. If the cost is changing, you can’t really have that conversation.
“And, so, it’s just resulted in this delay, where a lot of companies are waiting to see, … but ultimately, if you can’t offset most of the costs, you have to take some pricing. And so that’s where we are.”
Conagra Brands’ greatest exposure to tariffs is tinplate and aluminum for packaging, according to the company.
| Photo: ©WOLTERKE – STOCK.ADOBE.COMConagra Brands’ initial projection for fiscal 2025 was that inflation would be a 3% headwind. Now the company is estimating it will be 4%.
“So, we’ve seen an acceleration in inflation versus where we expected it at the beginning of the fiscal year,” Marbrger said. “It’s been sticky.”
Which led Connolly to his needle threading example.
“… This is precisely the needle the industry is trying to thread, which is if it’s an inflationary environment and then on top of that, you layer on new tariffs, you’ve got a responsibility to protect margins,” he said. “At the same time, investors and management teams have said it’s important to have volume growth because keeping the relationship between the consumer and brands is in the best interest of long-term brand strength and the future cash flows of those businesses.
“So, the question, I think, is if the environment remains inflationary, if tariffs stick and there is a cause for inflation-justified pricing, how does that coexist with the notion of surgically investing in merchandising to get volumes back to growth? Because when you take pricing, you trigger a new round of elasticity. And that elasticity, consumers have to adjust to the new pricing. And then if you don’t like the response you see, you’ll see manufacturers invest back trade, which basically unwinds some of the pricing.”
Adding to the pressure has been retailer management of inventories, Connolly said.
“One of the things we saw coming out of last quarter as we saw going into Q3, and you’ve seen this from other manufacturers, talking about retailers taking a conservative stance on inventory replenishment,” he said. “We thought that was going to improve this quarter, (but) it’s still more conservative as we see things.
“And how long is that going to last? It cannot last forever because I don’t think anybody is sitting on large levels of absolute inventory. But if you (retailers) think about it, if you think there is a strained consumer on the horizon, then maybe you’re anticipating velocities will slow and then maybe you hold a little bit lower inventory.”
Connolly declined to issue an outlook during the presentation, noting that “we’ve got a little bit of time to see how the dust settles.”
He added that he views many of the issues he discussed as “short-term things I view as heavily temporary.
“I think if we see a few green shoots … you will see a rather quick return to normalcy.”
