Macro-economic factors are hitting Campbell’s bottom line. Can the company reinvent itself before it is too late?
Mike Segar / Reuters
The food industry's big new themes are healthy eating and organic production, and so not a fried egg, strip of bacon or piece of sausage was in sight during The Wall Street Journal's breakfast interview Monday with Denise Morrison, now well into her fourth year as chief executive of the Campbell Soup Company. Instead, the roughly 115 guests who gathered at the Essex House off Central Park South in New York to hear Morrison speak were served sensible plates of fruit and granola to go along with their morning coffee.
The other thing mostly missing from the breakfast interview was any meaningful discussion about soup, which was mentioned only minimally relative to its importance to Campbell's business, where soup sales accounted for about 30% of its overall $8.3 billion in sales during its 2014 fiscal year, which ended on Aug. 3.
“Soup is a vital product and an economic engine for us,” Morrison said, in response to a question during the Q&A portion of the interview, “but we are definitely more than just soup.”
When Campbell's reported its fiscal 2015 first quarter earnings just before Thanksgiving, it said U.S. soup sales increased 6% for the three months ending Nov. 2, just the second time that has happened in 15 months. But there was no backslapping among executives or Wall Street analysts. The gain was a false one: the boost occurred mostly because big retailers like Wal-Mart — which ranks as Campbell's largest customer, accounting for just under 20% of its net sales — made their Thanksgiving and Christmas holiday orders earlier than usual.
The reality is that soup sales overall, and for Campbell's in particular, have softened since 2009. According to Chicago-based market research firm IRI, annual soup sales in the U.S. haven't grown by more than 2% since 2010.
Campbell's soup sales have mirrored or underperformed the overall market, according to IRI's data, falling every year — 2011 saw the biggest drop in dollar sales of 4.3% — except 2013, when sales grew 2.7%. So far, through the 52-weeks ending Nov. 2, overall soup sales overall have declined 0.5% to $5.9 billion, with unit sales dipping 2.1% to 4.5 billion. Over the same period, Campbell's has seen soup sales decline 1.8% to $2.6 billion, with unit sales dropping 2.7% to 1.7 billion.
While certain niches of the soup industry are growing, such as premium and organic soups, the big money categories like condensed and ready-to-serve are struggling. Macro-economic factors well beyond Campbell's control are to blame — from a shrinking U.S. middle class and high unemployment to shifts among consumers to organic and fresh food options and greater demand for transparency in how food is produced and prepared.
Over the last five years, Campbell's revenue has increased to $8.3 billion from $7.7 billion, but it has also acquired three companies that have added roughly $1 billion in sales to help goose its revenue figure. Its net earnings have steadily declined during that timeframe as well, from $844 million in 2010 to $818 million in fiscal year 2014.
“We continue to see canned soup as a share donor over time,” wrote JPMorgan analyst Ken Goldman in a research report about Campbell's first quarter 2015 earnings.
Put another way, Goldman thinks that soup — the condensed kind in those red-and-white cans Andy Warhol made iconic in particular — is a business that will grow little, if at all, for Campbell. He's not alone in his view — many other analysts who follow Campbell's share his opinion. Even the company's own executives are pragmatic about the long-term outlook for soup.
“Sales in our core soup business did not meet our expectations,” said Mark Alexander, president of Campbell's North American business, during the company's annual shareholder meeting in July. “While we are competitive again this year from a marketshare standpoint, we failed to drive category growth and this is an imperative going forward.”
There is, however, another, equally important imperative for the company — figuring out how to diversify away from soup into higher growth areas as quickly as possible. Campbell's doesn't want to be the food industry's version of a record label, stubbornly reliant on the sales of one product and dangerously ignorant of how it was being overtaken by newer, better, more consumer-friendly ones. That's why since 2012, Campbell's has spent just under $2.2 billion buying companies that have absolutely nothing to do with soup. It's new tagline is “Real Food That Matters for Life's Moment.” Food. Not soup.
To be sure, when asked at the Journal breakfast Monday if Campbell's would consider dropping “soup” from its name in the future, Morrison didn't dismiss the notion outright. She hedged, and even hinted that such a move may not be so far-fetched.
“Soup is our middle name,” Morrison said, before adding that in the future Campbell's will “behave our way into what we are called.”
Morrison, the 60-year-old to whom the challenge of transformation has fallen, is a company veteran who took over as Campbell's CEO in August 2011 with a mandate to reinvent the company. The New Jersey native and Boston College alum has been with the company for 11 years, recruited in 2003 by her predecessor, Douglas Conant. She is just the 12th CEO in the Camden, New Jersey-based company's 14-decade history.
According to a Bloomberg Businessweek article at the time of her appointment, Morrison was the safe, predictable choice. She had a stellar consumer packaged goods business pedigree, complete with stints at Pepsi, Nestle, Nabisco and Kraft, before coming to Campbell's, where she started her ascent up the corporate ladder as head of global sales and steadily rose to the company's U.S. president, senior vice president for North America, and chief operating officer.
But reinventing a nearly century-and-a-half old company apparently takes time. The business narrative for Campbell's is not much different today than it was in 2011.
“Americans seem to have maxed out their appetite for soup,” read the Bloomberg Businessweek story, which also said that Morrison's plans as CEO included “more consumer advertising and brand-building, ramped-up efforts in emerging markets, and new recipes aimed at millennials,” as well as “increased focus on soup for cooking, with cool iPad apps for recipes.”
“They are in turnaround,” said Erin Lash, a senior equity analyst at Morningstar. “She is working to reignite the company in dominate categories, as well as enhancing other areas of the business. So far, results have been slow, there hasn't been sustainable improvement.”
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Campbell's officially incorporated as a company in 1922, seven years before the start of the Great Depression. But its lineage traces back even further, all the way to 1869, or 145 years ago. The condensed soup that bears its name is as identifiable a part of the American family dining experience as McDonald's and Budweiser. Campbell's soup is used in more than 94 million homes in the U.S., with condensed soups found in 65% of those households, according to the company. Its soup and simple meals unit generates $3.6 billion in retail sales annually, with condensed soup accounting for $1.35 billion of that amount.
But times have changed.
“The food industry has had a tumultuous year,” Morrison said in her address to Campbell's shareholders during its investor day in July. “It has been a year marked by a persistently challenging consumer environment and by an unmistakable decline in the industry's performance.”
Actually, the tumult for Campbell's — and the packaged food industry generally — dates back to the beginning of the end of the financial crisis in 2009. That's when middle class families in the U.S., so squeezed by the great recession brought on by the sub-prime mortgage meltdown, were supposed to emerge to spur the economy with renewed spending vigor. Except that never happened. Instead, continued high rates of joblessness, soaring healthcare costs, and declines in government assistance for poorer families, among other factors, has resulted in a general climate of spending anxiety among the middle class. Families are looking to save rather than spend wherever possible, and if they don't need something, they aren't buying it. With respect to food purchases, that dynamic is reflected in the fact that sales at dollar and club stores are growing at a faster rate than traditional grocery stores.
Campbell's, not unlike McDonald's and Budweiser, also has a bit of a problem with younger consumers, whose shifting food buying decisions came when the company's healthy and organic product pantry was empty. Twenty-somethings are more conscious of their food buying options than previous generations, and they are increasingly making decisions based not just on how healthy something is, but also where and how it is grown, produced and even marketed. A recent study by the International Food Information Council found that about 40% of 20-somethings are in favor or more nutritional information on food labels — well above the percentage for other demographic — and 20% of them would pay more for sustainable products. They would rather have fresh, packaged fresh, or organic than frozen, canned or condensed food.
“Overall, packaged food companies are being challenged from consumers looking for healthier options across the board,” Lash said. “They want to eat healthier but don't want to feel like they are on a diet, so they aren't buying low-fat, low-sodium substitutes.”
This consumer transformation “has been building for a number of years and now appears to be at or near a tipping point in terms of its impact on the industry,” Morrison said at Campbell's investor day.
As is often the case, change driven by the 20-something generation involves not just the goods being purchased but also the method used to buy them, which is to say that digital disruption is finally coming to the food industry. Or at least companies are bracing for it.
According to digital research firm eMarketer, e-commerce sales are estimated to account for $347 billion of the $4.9 trillion in U.S. sales expected for next year. By 2018, those figures are expected to grow to $492 billion and $5.5 trillion, respectively.
But the food and beverage category is only expected to account for $8 billion of the $347 billion retail e-commerce total in 2015, and $11 billion of the $492 billion total in 2018, making it one of the smallest categories of online retail. Looked at another way, however, what that means is that food and beverages are ripe for e-commerce growth.
“Companies such as FreshDirect and Peapod have staked out a niche market for digital sales of food and beverages, and more recently, AmazonFresh and Wal-Mart have joined the online grocery competition,” eMarketer wrote in its U.S. Retail E-Commerce: 2014 Trends and Forecast Report in April. “Additional fulfillment options could increase the penetration of e-commerce in sectors that to this point have lagged behind others.”
Morrison, who speaks as if she just rolled off a CEO assembly line — she peppered her conversation with buzzwords, including “accelerating growth,” “create shareholder value,” and “platforms” a— called the potential growth of digital food shopping a “tidal wave that is going to hit the beach real soon.”