Conagra (CAG 0.40%) is a large consumer-staples company with a portfolio of well-known food brands. Selling branded food products is usually a pretty stable business, but lately consumers have changed the way they're spending.
Conagra is watching the trends, preparing for a return to normal consumer behavior. It's starting to see some silver linings on the dark clouds it's been facing.
Conagra thinks this time is a little different
The financial world tends to rhyme more than it exactly repeats. So each new event has to be couched in history, but you simply can't go in expecting the same thing to happen on a one-for-one basis. This is exactly what Conagra has been describing as it looks at the current round of inflation-induced price increases that have ripped through the consumer-staples sector.
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The normal path is that price increases lead to sales gains for a company, but at the expense of volume. Eventually consumers get used to the new pricing dynamics and volume comes back. This time around, however, the volume rebound hasn't materialized as usual. Conagra reported that it's seeing consumers limiting discretionary purchases, using up what they have in the house before buying more of a product, focusing less on convenience offerings, making larger meals, and making a more concerted effort to eat leftovers. The ultimate goal appears to be to stretch their dollars.
The money not going to food has been going to other things, like travel. The coronavirus pandemic is likely to blame for this drawn-out period of adjustment, since people are still trying to make up for the lost time they spent socially distancing. In light of what's going on, Conagra limited its investment in things like advertising, with an eye toward increasing spending in the second half of the year, when it hopes consumers will be more inclined to buy its products.
Conagra has been testing the waters
But this foodmaker isn't just delaying spending and hoping for the best when it starts to support its brands again. It's testing consumers to gauge the opportunity before it starts to put money to work. In the fiscal second quarter of 2024, for example, Conagra started to put some of its advertising budget to work in the frozen-food space. The goal was to see if consumers were willing to increase buying single-serve meals again.
On the company's earnings conference call, CEO Sean Connolly explained:
So, if you look at a product, like frozen single-serve meals, where we saw such tremendous lift in Q2, what you've got going on here is some consumers who were really financially stretched, were basically forced to give up on some of that buying rate. They didn't stop buying the category. They reduced their buying rate and they started doing things like scratch cooking rice and beans and ground beef. They do not want to do that.
What some consumers want is a quick meal. Many want is to avoid cleaning up after cooking. A growing portion want convenience. But to afford so-called "revenge spending" on things like travel, consumers pulled back wherever they could. However, with targeting brand support efforts, Conagra was able to achieve a 60% improvement in its advertising efforts. That helped to "lift" the company's market share in the single serve frozen food category after three consecutive quarters of decline.
There are still headwinds, but there's improvement, too
To be fair, Conagra tested increasing spending in just one category, so this doesn't herald a sea change for the food sector. However, it does show that consumers are willing to spend in areas where they see a benefit, such as convenience meals. Investors should keep an eye on Conagra as it tests out more areas ripe for increased investment. If it can keep finding products that consumers want to buy, which would clearly aid in a business turnaround, the stock's historically high 4.8% dividend yield today could end up being a temporary buying opportunity.
But don't view Conagra's potential successes and failures as only company-specific information. The experimentation Conagra is undertaking today is helping to expose larger trends in the consumer-staples space that can be applied across the industry. Basically, as an investor, you want to focus more than ever on companies with products that consumers value highly enough to buy even if they're under financial strain.
