H.J. Heinz Company (HNZ), ConAgra Foods, Inc. (CAG), Kraft Foods Group Inc (KRFT): Three Consumer Goods Companies and the Issues Ahead

The food industry is facing an era of lower margins as commodity inflation is impacting its players’ performance. Costs have increased due to a rise in the prices of raw materials, packaging, and fuel. Unfortunately, transferring these costs to the consumer through pricing is not an option for the companies, since price-sensitive consumers will divert their purchases toward other, lower-priced products.

Let’s analyze three food companies to see how they handle the pressure.

Main focus on growth and expansion

H.J. Heinz Company (NYSE:HNZ) has a global portfolio of leading brands in the ketchup and sauces, meals and snacks, and infant nutrition categories. Recently acquired by Berkshire Hathaway Inc. (NYSE:BRK.B), the Warren Buffett-led investment group, and 3G Capital for $28 billion, H.J. Heinz Company (NYSE:HNZ)’s business and iconic brands will expand even further.

Since fiscal year 2008, H.J. Heinz Company (NYSE:HNZ) has been increasing its investments in marketing almost 10% each year. Management focuses on driving growth in its 15 core brands, which recorded 5% organic growth in fiscal year 2012. Growth perspectives are good for the company. Global ketchup sales grew 8%, reaching more than $5 billion in fiscal 2012. Since the ketchup and sauces category represents almost half of the company’s sales, I expect Heinz to profit from a market that has not yet reached its full potential.

Ralcorp acquisition starting to show results

ConAgra Foods, Inc. (NYSE:CAG) is one of North America’s leading food companies, serving restaurants, grocery retailers, and other food service establishments. The company’s EPS for 3Q13 was $0.55, only $0.04 higher than the prior-year quarter. Net sales grew 13.4%, reaching $3.85 billion, driven by contributions from acquired businesses and increased volumes. On the other hand, operating profit is in decline, reaching 11.8%, against 14.2% in 3Q12 due to a rise in operating expenses.

In January 2013, ConAgra Foods, Inc. (NYSE:CAG) acquired Ralcorp Food Group, subsequently hitting a record in revenue. Ralcorp generated $292 million in sales and $22 million in operating profits during the quarter, reinforcing the company’s finances and strategic position in the frozen bakery and food products categories. In addition, the company’s plans to form a new mill, along with Cargill and CHS, are expected to outplace ConAgra Foods, Inc. (NYSE:CAG)’s current earnings.

ConAgra Foods, Inc. (NYSE:CAG) has a strong B2B presence and well-positioned brands focused primarily in the North American market. However, the company’s debt is growing due to the Ralcorp acquisition and a 30% YoY increase in marketing expenditures.

Cost savings, innovation, productivity improvements

Kraft Foods Group Inc (NASDAQ:KRFT) is a consumer packaged food and beverage company focused on convenient meals, refreshment beverages and coffee, cheese, and other grocery products.

The company reported earnings of $0.88 per share for 1Q13, surpassing most analysts’ estimates. Net revenue increased 2.1% YoY, reaching $4.55 million, carried mostly by advertisement and innovation investments. Organic revenue increased 2.1% as well, driven by volume gains and improved product-mix.