ConAgra products in grocery basket
ConAgra has shifted away from deep discounting on its products and moved toward more upgraded offerings.

CHICAGO — A shift away from past deep discounting activity has put pressure on ConAgra Foods, Inc. As the company has introduced upgrades and improvements to many of its branded Consumer Foods product lines, volumes have declined. The challenge facing management is to moderate the declines and convince shoppers to repeatedly invest in the upgraded, more expensive products.

Sean Connolly, ConAgra
Sean Connolly, c.e.o. of ConAgra

“First of all, if you look at our overall story in Consumer (Foods), as I’ve said many times, we’ve got to remember this is a transformation we’re undergoing here, not a flip of the switch,” said Sean Connolly, chief executive officer, during a June 30 conference call with financial analysts to discuss the company’s fiscal 2016 results. “And on volume in particular, the bottom line is this. It is an undeniable fact that our past promotional practices have embedded in our volume base a group of consumers who are not brand loyal, who only buy on hot deals, and who contribute virtually nothing to our profitability. It’s also true that by catering to them, we have underserved the bulk of our volume base, and these are consumers who would be willing to pay more for more contemporary, higher-quality offerings.”

Mr. Connolly added that he believes the dynamic is reversible as long as the company sticks to its principles around optimizing product mix and refreshing targeted brands.

“No one said this was going to be easy, but it is absolutely the right way to manage a branded asset for value creation,” he said. “We know from years of experience what the alternative gets us, and that’s precisely why we do not get spooked when we see volumes pull back and margins expand.”

Banquet frozen meals, ConAgra
ConAgra's Banquet brand is undergoing transformation.

One brand undergoing transformation is Banquet. ConAgra Foods has increased the price of Banquet products above its traditional $1 price point and eliminated discount practices that often push the brand’s price point below $1, said Tom McGough, president of the Consumer Foods business unit.

Tom McGough, ConAgra
Tom McGough, president of ConAgra's Consumer Foods business unit

“I think it’s important to highlight that we made product quality improvements in conjunction with the pricing,” he said. “What we are seeing from a consumer standpoint is that there are certainly households that bought Banquet because of the tremendous price value. We anticipated that we would lose some of those households.

“What we are beginning to see in the data is that the product quality upgrades are beginning to improve our repeat. But we’re starting from a base of decades of $1 pricing and … it will take time for us to rebuild (the) business.”

Mr. Connolly added that ConAgra historically has been one of the least disciplined companies with respect to taking pricing when it is required.

“…We’ve probably been the most over reliant in terms of deep discount trade, and we clearly need to undo that,” he said.

For fiscal 2016, ended May 29, ConAgra Foods incurred a loss of $677 million. During fiscal 2015, the company experienced a loss of $252.6 million.

Chef Boyardee products, ConAgra
One factor contributing to ConAgra's sales loss included a $50 million impairment charge related to ConAgra’s Chef Boyardee brand.

Sales for the year fell 2.5% to $11,642.9 million.

Management said a variety of factors contributed to the loss, most notably a non-cash, year-end pension expense for fiscal 2016 of $349 million due to changes made in 2012 related to pension accounting assumptions.

Other factors contributing to the loss included a $50 million impairment charge related to ConAgra’s Chef Boyardee brand, and $28 million related to restructuring charges associated with the planned spin-off of its Lamb-Weston business.

Lamb Weston potato products, ConAgra
ConAgra's spinoff of its Lamb Weston business is expected to take place this fall.

During the conference call, Mr. Connolly said work to separate the two companies continues. He expects regulatory filings related to the spin-off to occur this month and said the company will be hosting investor days for both companies in advance of the completion of the separation.

For the year, sales within ConAgra’s Consumer Foods business unit fell 4.5% to $7,225.1 million. Within the Commercial Foods business unit sales rose 1.1% to $4,417.8 million when compared with the same period of the previous fiscal year.

“We continue to see significant opportunities to drive growth across the Lamb Weston business, supported by food-away-from-home trends in the U.S. as well as growing demand in emerging markets,” Mr. Connolly said about the performance of Commercial Foods during the year. “Consistent with our plans to capitalize on these trends, we recently announced an important investment in our Richland, Wash., facility to expand our domestic production capacity, which we also leverage for exports.”

Management did not provide earnings guidance for fiscal 2017 due to the pending spin-off of Lamb Weston.