KANSAS CITY — Food companies are caught in a Catch-22. As manufacturers and restaurant operators seek to stay competitive in a soft consumer environment, many are leaning on aggressive discounting, which some executives argue is not a sustainable solution for long-term industry growth.
Complicating the issue is inflation in key commodities of beef, dairy, coffee and cocoa, prompting such companies as Hershey, Keurig Green Mountain and Chipotle Mexican Grill recently to announce price hikes of high-single to low-double digits on many mainstream brands. When Mondelēz International raised prices on a number of its products this year, the company encountered pushback from consumers and retailers.
“Given our share positions in most markets, we chose to lead those pricing actions, and while we anticipated that this would be disruptive in the short term, it has been even more challenging than we expected,” said Irene Rosenfeld, chairman and chief executive officer of Mondelēz, during an Aug. 6 earnings call with financial analysts. “In a number of key countries and categories our competitors have been slow to implement price increases. As a result, we are seeing some negative effects on consumer takeaway as well as on our share performance.”
The industry faces a tough choice: Lower prices and lose margin, or raise prices and lose volume?
|Competitive promotional activity is not sustainable in the current environment, some executives argue.|
While pulling the pricing lever has become a go-to move for many businesses, others such as Red Robin Gourmet Burgers refuse to play along.
“During the quarter we witnessed intense and in our estimation non-sustainable discounting from some of our peers,” said Steve Carley, chief executive officer of Red Robin, during an Aug. 14 earnings call. “We have no intention of following the aggressive discounting of our peers but rather seek to find a delicate balance of driving profitable traffic by differentiating ourselves through sustained everyday value, new menu innovation, our burger barbell strategy and superior…service.”
Competitive promotional activity put Pinnacle Foods in a pickle during the most recent quarter. The company said it is “reluctantly having to match some of the promotion that’s out there” to maintain market share.
“We are seeing more price competition than before,” said Bob Gamgort, chief executive officer of Pinnacle Foods, during an Aug. 13 earnings call. “I think our expectation, our planning assumption, is that we are going to continue to see more of the same going forward, both on an everyday basis as well as at the holidays.”
A more effective operating model for the industry, Pinnacle said, is consolidation. Synergistic acquisitions are a top driver of growth for the company, whose retail sales during the quarter were led by its latest purchase of Wish-Bone salad dressings.
“One of the things that I have noticed in the last seven sizable transactions that have been done in the food industry in 2014, five of the seven are U.S.-based public companies so you can look at the impact,” Mr. Gamgort said. “The acquirer’s stock price was either flat or down upon announcement of the acquisition, and that is quite a departure from what we’ve seen in the previous four or five years. What it says to me is that either the prices were too high or it wasn’t a great strategic fit. So I think our discipline remains around is it the right strategic fit, which means does it make us a better company over the long term? And really forget about the headline multiple. What are the after-tax, after-synergy multiples that we get? And that’s what we stay really focused on. That’s why we can pay good prices like we did for Wish-Bone but still deliver great benefits to the business.”
Of course, the long-term solution is economic recovery, Mr. Gamgort added.“When we look at numbers like the unemployment number, what we really look at is income, hours worked, and how are people feeling, you see all of those metrics still continue to be incredibly weak now going on five years,” he said. “When that turns around, the great majority of these problems will be solved.”