Hormel Foods Corp. remains focused on its goal of 5 percent top-line growth, 10 percent bottom-line growth and margins in the top quartile of the company’s peers in the next three years. But the company faces numerous challenges along the path to success in 2020.
Second-quarter earnings declined 29 percent in the company’s Jennie-O Turkey Store business. Sales in the segment fell 8 percent, while volumes declined 6 percent. President and CEO Jim Snee attributed the performance to weakness in turkey prices, increased competition and increased expenses.
“First, turkey prices, such as breast meat, have maintained their seven-year lows and in some cases, declined further since the first quarter as the industry continues to be in an oversupply situation,” Snee explained in a May conference call with analysts. “History suggests the turkey industry will balance supply and demand and market conditions will improve in the coming months. In turn, we have made additional adjustments to our production levels and would expect volumes slightly under 2014 levels. The impact to our business continues as commodity sales pricing and whole bird pricing is much lower than last year. Lower turkey prices are also pressuring prices in Jennie-O Turkey Store’s three sales divisions: retail, deli and foodservice.”
Increased competition from other turkey suppliers, in addition to competing proteins such as beef, also pressured results in the Jennie-O business, Snee said. Additionally, the segment incurred higher operating expenses and related “bird performance issues” in the company’s conventional and antibiotic-free flocks.
Snee added that the company expects percentage declines in earnings for Jennie-O Turkey Store “to be in the high teens for the second half of the year,” until the industry reduces turkey production levels.
But bright spots for the turkey business include recent 12 weeks scanned data showing the Jennie-O brand continues to outperform the ground turkey category. “Despite the market conditions and operating challenges, the Jennie-O Turkey Store team grew value-added volumes 1 percent this quarter and grew lean ground turkey tray pack volume by double digits,” Snee said.
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During Hormel’s 2017 investor day, which was held in June, Snee outlined six strategies that will give Hormel Foods the momentum to achieve its goals. The six strategies include continuing to become a more diversified food company; expanding and accelerating its foodservice business; expanding its international footprint; reducing volatility and increasing balance throughout the business; divesting assets that do not perform; and modernizing Hormel’s supply chain.
|Jim Snee, president and CEO of Hormel|
“We are deeply rooted in the meat protein space, and that’s a space that we know and we love both in the retail, foodservice channel, (and) domestic and international space,” he said. “But over time, we have to become a broader food company and build that balance across our portfolio.”
Hormel has rapidly diversified its portfolio during the past six years with the acquisitions of Skippy peanut butter, CytoSport sports nutrition products and Justin’s nut butters.
Management also sees opportunities to translate the branded product success it has had at retail to foodservice. The focus will be on delivering insights and solutions to improve foodservice operation efficiencies.
“… The fact is when you think about all of the macro issues happening in the world today, the macroeconomic issues, we could not have asked for better alignment to support the expansion and growth of our foodservice business,” Snee said. “What’s happening with operators? They can’t get labor. Wages are escalating. Nobody knows what’s happening with health care.
“And guess what, foodservice is becoming blurred. Yes, there’s traditional restaurants (and) hotels. But retailers, retailers are delving into this foodservice space. They’re trying to capture their fair share of those dollars that left the retail store. The prepared food efforts from retailers is greater than any time in my history with this company. …We have the knowledge and the expertise to export throughout our organization to capitalize.”
Today, foodservice represents 27 percent of Hormel’s total portfolio and a key point of differentiation is the company’s focus on brands, including Café H, Jennie-O Turkey Store, Fire Braised Meats and Austin Blues.
“We also create products that meet specific operator needs such as pizza toppings, sliced meats, bacon and precooked products, making our foodservice operators’ preparation easier and more cost-effective,” said James M. Splinter, group vice president of corporate strategy.
And don’t rule out Hormel when it comes to strategic acquisitions. The company is looking for acquisition targets both in the United States and internationally with a focus on Asia and South America, Snee said during a presentation at the Consumer Analyst Group of Europe conference in London.
“We haven’t done exclusively an international acquisition; we’d love to do that,” he noted. “Quite frankly, we haven’t done anything to support our very successful foodservice business. We’d love to be able to support and scale that in some other areas, because everything they’ve done has been on an organic basis.”