Will lower inflation spur more ad spending?
In the case of ConAgra Foods, the answer is yes. On an earnings call today the company cited better-than-expected input costs as one reason it hiked marketing spending 33%, or $27 million, in its fiscal third quarter, which ended Feb. 24. Like a lot of food companies, ConAgra last year was forced to raise prices in the face of rising inflation, which hurt sales volume.
But raw-material-cost concerns seem to be easing across the food industry. Jonathan Feeney, an analyst with Janney Capital Markets, reported this week that his "Feeney's Food Cost Factor" is down 5.1% on a year-over-year basis. Packaged-food costs in March were driven down in part by larger-than-expected grain stockpiles. Another positive pricing sign came Tuesday when spice marketer McCormick & Co. said its cost inflation "will moderate from a high single-digit rate of increase in 2012 to a level close to 3% in 2013."
ConAgra reported inflation of 1% in the quarter, which was "a bit better than our expectations," executives said.
"We have lapped most of the significant pricing we took last fiscal year to deal with inflation," CEO Gary Rodkin told analysts. "We're confident that volumes will continue to sequentially improve in [the company's current quarter] and into fiscal 2014."
But for the third quarter ConAgra reported a sales-volumes decline of 3%, excluding acquisitions. In a note to investors, Janney called that performance "disappointing amidst the broader landscape of improving branded-food consumption." Net income fell to $120 million from $280 million a year earlier, as costs increased related to its recent acquisition of private-label company Ralcorp.
Andre Hawaux, president of ConAgra's consumer-foods division, attributed the volume decline to price increases it took in 2012 on its Banquet frozen-meal brand, a situation he said was improving as the company begins to lap the increase. He also said the company decided to put more merchandising activity behind Chef Boyardee in the current quarter vs. the third quarter, as it did last year. Finally, he indicated that the Orville Redenbacher microwave-popcorn business has been weak, but said ConAgra is working on ways to return the the category to growth.
Some of the new marketing investment last quarter was behind a new ready-to-eat version of Orville Redenbacher popcorn, which hit stores last year. The company also hiked spending on Marie Callender's, Pam and Reddi-Wip in an attempt to accelerate these already-growing brands. Smaller brands, such as Ro-tel tomatoes, Rosarita beans and Wolf Chili, are also getting more ad support as the company seeks to increase distribution. Ro-Tel is advertised jointly with Kraft Foods Group's Velveeta in a unique partnership between two companies that compete in other categories.
ConAgra's agencies include DDB, San Francisco, which handles Marie Callender's, Pam and Rotel; and Venables Bell & Partners, which handles Healthy Choice, Orville Redenbacher and Slim Jim. ConAgra's media agency is MediaCom.
ConAgra is also boosting what Mr. Hawaux called "big-platform marketing in the shopper marketing area." He cited the company's "Child Hunger Ends Here" campaign, in which ConAgra makes donations to Feeding America each time consumers enter product codes displayed on its products on a special website. The effort, which includes retail promotions and social media, will be plugged during a performance by Jewel at this weekend's Academy of Country Music Awards on CBS.
Mr. Hawaux declined to give specifics about marketing plans for fiscal 2014, but indicated that some of the new brand investments would be "leveling off."