This from article from Investopedia illustrates the positive impact a worsening economy will have on Private Brand and the negative impact it will have on the national brand competitors. The key question is whether Private Brands will be able to maintain their gains after the economy rebounds.
This year was a good one for most food companies as they were able to remain profitable despite the economy, but not all food companies were immune to the slowdown. Companies with higher-priced brands like Kraft (NYSE:KFT), Heinz (NYSE:HNZ) and Lancaster Colony (Nasdaq:LANC) all took a hit in 2008. Although, to be fair, their hit was nothing like the 40% drubbing the S&P 500 took. Astonishingly, Kraft’s stock was still in the black as late as October.
Economically, we know it’s going to be tough in 2009, so what does this mean for food stocks? Well, people still have to eat.
In mid-December, Kroger (NYSE:KR) indicated that its customers were trading down in a big way to its own private label products, eschewing name brands for less costly alternatives. According to Kroger, 14% of its customers traded down to its house brands. That might not seem like a lot, but spread across other large chains like Safeway (NYSE:SWY) and Supervalu (NYSE:SVU) and you don’t have to be an economist to see that it will hurt food stocks with premium-priced brands. The price increases the big-name food makers took earlier this year might need to roll back if the recession continues for an extended time. Grocers certainly will argue that tumbling commodity prices warrant reductions. It will be interesting to see how it plays out in 2009. Personally, I can’t see the food companies giving back those gains but you never know if things get dicey. (Bear markets can terrify even seasoned investors. (To learn how to invest safely, read Four Tips For Buying Stocks In A Recession.)
Private Label Growing
Kroger’s private label products now account for 26% of its overall business. It’s clear that makers of private label products will benefit in 2009. Ralcorp (NYSE:RAH) is a company I wrote about in 2008; it is the biggest publicly traded, private-label food manufacturer in the U.S. and it has an excellent opportunity to benefit from the consumers desire to cut grocery spending. In 2008, Ralcorp integrated Kraft’s Post cereal unit, which it bought for $2.6 billion in an all-stock purchase. Under the deal, Kraft shareholders would own 54% of Ralcorp stock after it is completed. Questions remain whether the private label company can market name brands as well. I believe it can and Kraft shareholders will benefit indirectly from this, reducing the hit, if any, they might take on the Kraft side of business.
The Winners Circle
Kraft’s management foresees 4% organic growth for the company in 2009 with GAAP earnings per share (EPS) of $2.00, up from $1.54 in 2008, which excludes a 42 cent per-share net gain from the Post sale. It’s clear by its statements in the press that it doesn’t feel the economic headwinds will hurt it in a substantial manner. I tend to agree. Its brands are strong. Heinz is confident fiscal 2009, which are at the end of March, will produce organic sales growth of 6% and EPS between $2.87 and $2.91. As for 2010, it is less eager to provide guidance until the year end due to the economic uncertainties. Compared to management at Kraft, they appear a little more worried about the implications of a prolonged recession on their business.
Lastly, first quarter results for Lancaster Colony, ended September 30, 2008, were a mixed bag. Most importantly, however, its specialty food operation increased sales by 19% to $220.8 million, representing 84% of its business. The remainder was from its candle business. While still in a transition, management feels the move to become more of a food operation will help it weather the slowdown in 2009. I couldn’t agree more.
Kraft, Heinz, Lancaster Colony and Ralcorp all have high hopes for 2009. Managers are expecting organic earnings growth as customers seem to absorb the higher costs associated with increased commodity prices. In addition, with the exception of Ralcorp, they all pay nice dividends. When considering stocks like this, remember, people need to eat.