Will Tough Times Endure for Food Manufacturers in 2Q17?

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Part 3
Will Tough Times Endure for Food Manufacturers in 2Q17? PART 3 OF 6

Why Are Food Manufacturers Struggling to Boost Sales?

Weak consumption to blame

Packaged food manufacturers are struggling to accelerate sales, as weak consumption due to the consumer shift toward well-being foods is weighing on their financials. Low fresh food prices are also dampening growth prospects.

As the graph below shows, most companies operating in this space have posted YoY (year-over-year) sales declines—except Hershey (HSY), which has managed to drive volume growth on the back of increased demand for new products.

Why Are Food Manufacturers Struggling to Boost Sales?

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1Q17 in spotlight

Hershey has clearly outperformed its peers in terms of sales growth. Whereas most of its peers reported YoY sales declines, Hershey’s 1Q17 sales benefitted from increased volumes, specifically from its barkTHINS brand acquisition and higher price realization. Favorable currency and the rollout of Hershey’s Cookie Layer Crunch bars have also contributed to sales growth.

At the same time, the company’s strong performance in emerging markets and its continued market share gains in the US (SPY) in the candy, mints, and gum category are expected to boost its performance in coming quarters. Hershey’s management expects sales to increase at the low end of its guided range of 2%–3% in 2017, benefiting from acquisitions and innovation-driven products. However, softness in China is expected to remain a drag.

Mondelēz’s sales dip

Mondelēz International’s (MDLZ) 1Q17 sales fell 0.6% YoY, as lower volumes and adverse currency movements offset higher pricing. Notably, the company has now reported sales declines for the past 14 consecutive quarters. Going forward, the management projects organic sales to rise 1% in 2017.

Higher sales of power brands, traction in its well-being products, and strength in its distribution channel are expected to boost sales growth. However, in the near-term, continued softness in North America and adverse currency movements will likely continue to dent the company’s financials.

Kellogg’s sales decline

Kellogg’s (K) 1Q17 sales fell 4.1% YoY driven by a 5.7% fall in volumes. The downturn in category-wide consumption, mainly in the US and Europe, and adverse currency movement both took a toll on sales performance.

Given its challenges, Kellogg’s management expects sales to fall 3% in 2017. The one-time challenges that negatively impacted 1Q17 shipments are likely to abate, however, and the company is supposed to report sequential improvements in sales going forward.

Kraft Heinz’s sales decline

Kraft Heinz (KHC) reported a 3.1% decline in sales in 1Q17, reflecting weak volumes. Notably, the company’s 1Q17 results were negatively impacted by one-time events, including delayed tax refunds and distribution losses at certain club channels and a withdrawal of low-margin products.

These factors won’t likely be there in coming quarters, which will likely result in sequential improvement. Innovation-led products including Cracker Barrel Mac & Cheese and Devour Frozen meals should continue to drive organic sales. However, industry-wide softness and currency headwinds should continue to pose challenges in the near term.


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