CHICAGO (AdAge.com) -- The flagging economy continues to be a boon for package-food companies with strong brands. General Mills and ConAgra both reported healthy sales growth this morning, but commodity price fluctuation has begun to make a muddle out of overall profitability. Both companies maintain that increased marketing support will keep their flagship brands ahead of lower-priced competition.
"The current economic environment is challenging, but our brands are a good fit with consumers' needs for great-tasting, healthy, convenient foods at a good value," General Mills CEO Ken Powell said during a call with investors. "Our balanced approach to protecting margins, reinvesting in our brands and ensuring our products provide good value for consumers is working."
General Mills' sales were up 8% to $4 billion, but earnings fell 3% to $378 million, due to commodity positions. Some of that loss was offset by the sale of Pop Secret popcorn. The company increased consumer marketing investment by 21% in its second fiscal quarter, over a 10% increase in the year ago period.
Marketing marquee brands
"Companies with strong brands and brand equity are doing pretty well in the short term," said Christopher Shanahan, research analyst, Frost & Sullivan, noting that more consumers are eating at home now compared with a year ago. "But consumers are becoming more price-sensitive, especially when they see the same product next to store brands. There's a lot of trading down occurring." Moving forward, Mr. Shanahan said companies will need to focus on marketing marquee brands and divesting what's left over.
At General Mills, yogurt, Pillsbury products and cereal played important parts in the company's second-quarter success. Moving forward, the company will lean even harder on flagship brands like Cheerios. Original, Honey Nut and Multigrain Cheerios have all been posting double-digit gains. Next year, Mills will roll out Banana Nut Cheerios.
In addition to increased advertising, the company seems to be driving efficiency within its spending. The recent "home is calling" campaign for Pillsbury marketed the full brand portfolio rather than specific products, and used internet, billboards and even movie theaters in addition to the usual TV.
"Advertising is helping to drive penetration," said Pillsbury President Juliana Chugg. "Consumer response to this campaign has been very positive so far during the holiday baking season and it's contributing to good growth in our refrigerated dough category through the Thanksgiving holiday."
Stuck in the middle
The company's strong results, paired with the growth in private-label business, underscore the difficult position of in-between brands -- those with third, fourth or fifth market positions. Mr. Powell said that General Mills tests its products against private labels, and has been pleased with his company's gains, compared with those of house brands. But he conceded that he current environment is squeezing middling brands.
ConAgra, which makes Healthy Choice, Chef Boyardee and Peter Pan, also reported earnings today. Many of the company's brands occupy third-place market positions. ConAgra's second-quarter profit plummeted 31% to $168 million, largely on commodity hedges. Sales were up 11% to $3.3 billion, but most of the increase is attributable to price increases it's taken over the past several quarters.
"Winning companies are those with category-leading brands, relatively low private label exposure, and capabilities to drive category growth," UBS analyst David Palmer said in a recent research note. "Companies such as ConAgra that have relatively fewer leading brands and higher private label exposure are showing some alarming market share declines." Competing with Nestle, the 900-pound gorilla in frozen food, Mr. Palmer expressed concern about ConAgra's ability to "defend its brands vs. a competitor with much deeper pockets."