Tuesday, November 23, 2010

Campbell Soup Q1 2011 Results

Campbell Soups gave Q1 results today and they disappointed the market. I was struck by how their statement, if married with Heinz numbers -a few days earlier- create a illustrative microcosm of what is going on in the global economy.

Firstly, Campbell Soup talked about a difficult consumer environment in ready-to-serve and condensed eating soups. In fact, they referred to it as being subject to ‘extraordinary competitive activity’. Volumes appear to be ok, but pricing isn’t. Furthermore, whilst they had stepped up their promotional profile, they stated that they didn’t match some of the promotional activity. The latter point probably goes some way to explaining why their promotions had had limited market impact. They also referred to the need to re-assess how consumer tastes were changing.

However, it isn’t just the softness in the North American Consumer that concerns them. They also referenced upcoming commodity cost inflation.

Frankly this doesn’t surprise me, because commodity prices (particularly softs) have been rising recently. For example…




…and this will inevitably put pressure on margins.

Clearly, the issue of commodity price inflation is not isolated to Campbell Soup. However, Heinz had a much more upbeat message

…which was characterised by strong growth in emerging markets.

“Without question, emerging markets were the growth engine in the quarter and in the first half of the fiscal year. Emerging markets achieved double-digit organic sales growth of more than 10% in the quarter, enabling Heinz to deliver our 22nd consecutive quarter of organic sales growth.
The strong emerging markets sales growth was fueled by excellent results in China, India, Indonesia, and Russia. Overall, emerging markets generated 15% of the company's total sales in the second quarter, and have generated over 16% through the first half of fiscal 2011. “

So the key message is that consumer growth is occurring in emerging markets. The flipside of this is that, it is this very demand which is helping push up costs. As a general theme, the message is to be wary of commodity cost inflation, particularly if your end markets are focussed on protecting market share in Western markets.

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