Pork and peanut butter

by Bryan Salvage
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On Jan. 3, Hormel Foods Corporation raised a lot of eyebrows when it announced it was acquiring the Skippy peanut butter business from Unilever United States Inc., of Englewood Cliffs, NJ, for approximately $700 million.

This acquisition is quite impressive. Skippy’s domestic peanut-butter line consists of 11 varieties of shelf-stable peanut butter products. Hormel pointed out this brand holds the No. 2 share in this growing, center-of-the store category and is the leading brand in the faster-growing subcategory of natural peanut butter. Peanut butter is a $2 billion category in the US with a 74 percent household penetration. It is the second most-popular sandwich behind ham in this country.

On the international stage, Skippy peanut butter is the leading brand in China and is sold in more than 30 other countries on five continents. Total annual sales are expected to be approximately $370 million, with nearly $100 million of those sales coming from outside the US.

"The acquisition of the Skippy peanut butter business represents a significant opportunity for Hormel Foods. It allows us to grow our branded presence in the center of the store with a non-meat protein product and it reinforces our balanced portfolio," said Jeffrey Ettinger, Hormel’s chairman of the board, president and chief executive, at the time of the announcement. "The fast-growing international line will also strengthen our global presence, and should be a useful complement to our sales strategy in China for the SPAM family of products."

During an analyst teleconference later that day, Ettinger said the transaction is expected to close in two parts: the domestic business is expected to close within the second fiscal quarter of 2013 and the China business by the end of fiscal 2013.

“We feel this transition will enhance our balanced business model in a number of ways,” he said. “First, it adds a significant and valuable new franchise to two of our reporting segments: Grocery Products and our All Other International segment. The domestic product line fits easily within our Grocery Products shelf-stable portfolio where it will become one of our biggest brands.

“Skippy is also the leading brand of natural peanut butter, which represents 25 percent of domestic sales and is driving category growth,” Ettinger said. “The franchise also includes an interesting, faster-growing international component, including significant volume in Canada and the No. 1 market share in China.”

China has been a focus market for Hormel Foods for more than a decade. Peanut consumption is high in that country and peanut oil is a staple of Chinese cooking, Ettinger continued. Peanut butter currently has a low household penetration level there, but it is growing rapidly. Hormel anticipates leveraging this part of the business to complement the recent introduction of its Spam family of products in China.

Hormel Foods previously demonstrated its interest in complementing its value-added meat portfolio with extensions into such areas as Mexican food and side dishes, Ettinger said.

He further explained that sales of Skippy in China are in the $30-$40 million range annually. China and Canada are the two largest components of the international sales.

One analyst pointed out the Skippy acquisition will be the largest acquisition deal Hormel Foods has made to date, with the last major one being its highly successful Jennie-O acquisition. When asked what the biggest opportunity is for the Skippy brand long-term, Ettinger said he sees three strategic opportunities. “I think we’re going to do a good job on the core business domestically,” he said. “We’re a good blocking-and-tackling company. We know how to handle iconic brands, as we shown by our ability to continue to grow Spam – another iconic American brand that also started in the 1930s.

“Secondly, when we turn our innovation skills loose on this brand, we’re going to find ways to take the product out of the jar and to make the Skippy name useable on other types of products,” he added. “Third, are the outside-of-the-US opportunities and China would be front-and-center. There are only two processing facilities that come with this acquisition and one is in China. That now will increase our stable of business properties in China to three: Beijing, Shanghai and now this one [in Weifang, China]. We think there are great opportunities to catch the wave of growth in that market and to synergize between the shelf-stable Spam rollout and this product.”

‘Is Hormel Foods starting to shift away from its core strategy of high-margin businesses?’, Ettinger was asked. He responded: “We feel we can do a very solid job with the core peanut-butter category. It is a higher household penetration category than many of our current categories. There are always share opportunities and we will always be aggressive against current players in those areas. We feel one opportunity is in the area of innovation. We have seen other American brands do a very good job of ultimately [moving a product] into some other categories that make sense for that brand.

“From our perspective, [peanut butter] is a niche new product in many [international] markets,” he added. “Those consumers are just catching onto American-style peanut butter, but they have very good growth rates. This brand got out there first and is well positioned to take advantage of that so we do expect a faster growth component.

“We’ve talked about wanting to have a balance between packaged products and protein,” he continued. “We’re excited about having the ability to bring on what we think is a good fit in the packaged food space. This enhances our position as a packaged food player in a logical way on the domestic side. We’re also excited about outside the US – $100 million in sales is a 30 percent sales increase through our reported international sales right off the bat and it’s growing at a good clip.”

One analyst asked how the rollout of Spam in China is expected to progress and how Spam and Skippy would be expected to work together in China. Ettinger replied Canada and China are two markets where Hormel sells Spam. “We’re pretty early on in China still,” he added. “We started our efforts to sell there about three to four years ago. We fell victim to a trade dispute and for a stretch we were not allowed to sell the product there. We have now been back at it for a little over a year. We think we’re off to a good start with that, but we do think any time you can bring more offerings to a customer and be more important, that’s helpful. The fact that Skippy has been at it longer than that and has a plant in that market will be a leveraging point to accelerate our progress selling Spam in that market.”

I remember having conversations with former Hormel Foods chairman, president and CEO Dick Knowlton about new products and new product strategies back in the early 1980s. Knowlton was the first Hormel CEO committed to diversify product offerings in a major way into non-meat food products – plus to focus more on value-added meats and away from commodity products.

“Our balanced business model allows the company to diversify our portfolio and position our businesses for long-term growth,” Hormel relayed to me late last week in a statement.

Hormel Foods is no stranger to acquiring food companies that do not make red meat or pork. For instance, it acquired Farm Fresh Catfish, Greensboro, Ala., in 1983, to meet the growing demand for fish as a low-fat, high-protein alterative to red meat. In 1986, the Jennie-O turkey business based in Willmar, Minn. was acquired, and in 2001 Jennie-O Foods and The Turkey Store Company merged under Hormel Foods Corporation to become Jennie-O Turkey Store Inc. In 1988, Hormel acquired Chicken By George Inc., which was at that time only a 2.2 year-old company founded by former Miss America Phyllis George.

All of these acquisitions were eyebrow-raising when they were announced.

Hormel’s frequency of non-meat food company acquisitions only picked up steam in the 2000s: In 2002, Hormel acquired Diamond Crystal; 2003, Century Foods International, 2005, Manny’s; 2008, Boca Grande Foods; 2009, MegaMex Foods; 2010, Shedd’s Country Crock; 2011, Wholly Guacamole – and most recently, the Skippy acquisition.

“When considering acquisitions, we look at companies that fit strategically within our business plans and have the potential to enhance our balanced model. In the case of the Skippy acquisition, it adds a non-meat protein to our portfolio under a very well-known and extendable brand,” Hormel told MeatPoultry.com. “We are always actively looking, and our long-term plan for growth is through strategic acquisitions and delivering a wide range of value-added, branded products to our consumers.”

So, it’s a safe bet to assume that the question industry observers should have moving forward isn’t, “Will Hormel Foods acquire another major, non-meat food business in the future?” – but rather “When will Hormel’s next acquisition of a major (non-red meat or pork) food business happen?” My guess it will be sooner than later.

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