|Mark Clouse, CEO of Pinnacle Foods|
“ … As we finish up 2016, we’ll be roundabout 30 percent from where our gross margins are,” said Mark Clouse, CEO, on Dec. 15 during the company’s annual investor presentation. “The fact is, though, that even at that rate, we still sit well below our peer group, which is averaging around 36 percent. As we looked at the business, sure, there are some reasons why we don't expect to be the highest gross margin in the industry … (but) we don’t see structural reasons why we shouldn’t be able to begin to close down this gap to peers.” Key to closing the gap will be efforts to improve both horizontal and vertical costs throughout the organization.
“When I talk about horizontal costs I'm talking about the opportunity to drive scale as an enabler to creating more savings,” Clouse said. “This is an area I’ve spent a lot of time on over the last five years, in looking at economies of scale and finding where the opportunities exist to take a step back and look at the overall business.”
Pinnacle Foods’ infrastructure consists of 16 plants and “probably more than three times that,” said Clouse, in co-manufacturers. The company also has 18 warehouses, and, in that network today, it is manufacturing frozen dinners in 12 different plants.
“There is opportunity there to drive scale,” Clouse said. “We have about 700 suppliers in our network, about 3,500 SKUs (stock-keeping units) and over 7,000 ingredients, including 28 different types of black pepper.
“So our opportunity to put teams and focus on each of these areas allows us to attack horizontal costs and find opportunities in scale across all of these different areas. And that’s what we’re mobilizing against as a way to amplify our margin agenda. And in doing that, we’ll focus on simplification, optimization, and, in some cases, rationalization to unlock those savings.”
Clouse described vertical costs as “taking the things that we’re running and running them even better.”
“In this area the name of the game will be continuous improvement,” he said.
An area ripe for improvement is Pinnacle’s ability to move more of it business to direct plant shipments versus running shipments through the company’s network.
“ … We operate at 10 percent today with a goal to double that by 2019,” Clouse said. “In that particular bucket and in that area, we have the potential to save 20 percent on our costs, route to market, when we make that move.”
Building out Boulder Brands
In late 2015, Pinnacle Foods acquired Boulder Brands for approximately $975 million. Since then the company has been integrating its operations into Pinnacle’s network. In the coming year, Clouse sees several areas of opportunity.
“The idea that we can drive horizontal and vertical cost savings by driving scale and taking our best practices from Pinnacle and applying them to Boulder is a significant opportunity for us to improve overall margins on the Boulder business,” he said.
Since the acquisition, Boulder has transitioned from 45 co-packers to 25, gone from three plants to two, and is in the process of reducing the warehouses utilized from 16 to 6.
“The other area of opportunity is we’ve talked a lot about the SKU rationalization program,” Clouse said. “The fact is by the end of 2017, we will have taken out 47 of the SKUs in Boulder, which represent only 9 percent of the net sales. There’s no question there is a benefit to doing that immediately. But there’s also a benefit to running that more streamlined portfolio in the future; the efficiency, as well as the mix benefit, with fewer SKUs.”
Managing mix and price
Pinnacle Foods management has been effective in developing premium tiers for its brands during the past few years. Its Duncan Hines brand, for example, includes Perfect Size, which is a portion-controlled, convenient indulgence. The company also has created similar premium tiers within its Birds Eye and Wish-Bone businesses. Clouse said the company will continue along the premium path and focus on innovation that creates margin accretive innovation.
Another area of opportunity is managing price throughout Pinnacle’s product portfolio.
“What’s important to note as we tackle this area is the continued partnership that we need to have with retailers to make sure that we’re creating win-win solutions where we’re able to help them deliver in their challenging environment as well as continuing to move our margin forward,” he said. “And finally, price-size architecture as an enabler for us to use our product base to expand into new occasions and new channels while also adding margin.”