With the liberalisation of foreign-exchange allowances that permit South Africans to invest offshore, many local fund managers have advised clients to stock up on well-known and trusted brands such as IT titans Apple, Microsoft and Google, big pharma stocks like Johnson & Johnson, and consumer goods giants such as Unilever. Until recently, iconic American food company Campbell Soup Company would have fallen into that category, but the company has not adapted quickly enough to demographic changes and its share is priced for growth while not delivering on this.
Campbell’s has been around for almost 150 years and the bedrock of its business is canned condensed soup, as immortalised by the 1960s artworks of Andy Warhol. These high-margin, fast-moving commodity soups have been gradually losing their allure as consumers demand fresher products. They now only appeal to an older demographic that grew up on cheap and cheerful icons of everything that used to be great about the US. Retailing for less than $1 a can, Campbell’s soups offer excellent value but as high-sodium-content condensed soups continue to lose their popularity, it is vitally important that Campbell’s adapts to a new order with respect to execution, notably in the fresh arena. The company is challengingly compelled to adapt to a changing consumer paradigm — while still maintaining its relatively high levels of profitability.
Under CEO Denise Morrison, the company went on a buying spree of fresh produce companies such as Bolthouse Farms and Garden Fresh Gourmet. And besides focusing on new product offerings, Campbell’s has also embarked on a significant cost-cutting programme with reasonable success.
Its European, Russian and Mexican businesses have been disposed of and Campbell’s is now mainly a US, Canadian and Australian business, with roughly 80% of revenue and profits coming from the US. The company is on track to achieve $300m in cost savings in financial 2017, estimating it will achieve annual cost savings of $450m by financial 2020. Of course, even with these impressive claw-backs, Campbell’s is still nowhere near the levels of efficiency enjoyed by the acknowledged leader in cost-cutting, Kraft Heinz.
Morrison has stressed on many occasions that Campbell’s strategy is correct and if the group perseveres, chances are that it will return to a sustainable growth path. She sees the main problem as being in execution, and that is understandable in a company that has for so long relied on a strategy of "pile ’em high, sell ’em cheap".
However, not everything is within Morrison’s control, a classic example being in agriculture. Last year, the carrot crop in California, the main US carrot-growing area, was much smaller than usual. Campbell’s is the second-largest carrot supplier in the US, after Grimmway Farms, and therefore suffered because of this poor yield.
Also in 2016, contamination in Bolthouse Farms protein drinks led to widespread recall of many of its products. This issue has been rectified but once again highlights some of the difficulties that come with operating in the fresh food industry. "We have experienced a number of missteps in the nontraditional side of the business," says senior manager of investor relations, Blake MacMinn, "but we have stabilised the carrot situation and the beverage recall is unlikely to recur."
Year to date, Campbell Soup Company share price has fallen almost 7% while the S&P 500 has risen nearly 9%. Campbell’s also missed its third-quarter earnings per share estimate of $0.64 by five US cents. At a share price of almost $57 and forecast earnings per share of just over $3, the forecast price earnings ratio is 19 times. Hardly a dripping roast, the share may have an attraction for the long-term investor, if management’s strategy and execution succeed.
• Gilmour is an investment analyst.
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