Shares of major packaged food companies have been trading lower since June as investors fear that Amazon.com, Inc.’s (AMZN - Free Report) $13.7 billion buyout of the organic grocer Whole Foods Market, Inc. would make a seismic shift for retailers.
Shares of a number of grocery store chains, including The Kroger Co. (KR - Free Report) and Sprouts Farmers Market Inc. (SFM - Free Report) , dipped on Aug 28, after the deal officially came into effect. The deal was announced in mid-June. Losses spread across the food sector and shares of The Kraft Heinz Company (KHC - Free Report) , Post Holdings Inc. (POST - Free Report) , Kellogg Company (K - Free Report) , ConAgra Foods Inc. (CAG - Free Report) and Treehouse Foods Inc. (THS - Free Report) tumbled as well.
Traditional packaged food brands such as General Mills, Inc. (GIS - Free Report) , Kellogg and Conagra are already struggling, as consumers look for fresh foods and more natural brands over packaged and processed food.
Kraft Heinz has been witnessing top-line weakness for the past several quarters. Its reported sales of $13.04 billion declined 2.4% year over year in the first six months of 2017 due to soft consumer demand in North America and Canada. For Kellogg, net sales declined 3.3% year over year due to foreign currency headwind and weak volume (down 5.3%) as a result of unexpectedly soft consumption trends across most categories during the period. General Mills' sales too have declined 6.8% in fiscal 2017 and the company’s slowing organic volumes are overshadowing minor improvements in profit margins.
That said, these major packaged food companies have been fighting the sales slump with consumer-focused innovation, marketing initiatives and robust restructuring savings.
For General Mills, adjusted gross margin advanced 50 basis points or bps and adjusted operating margin increased 130 bps in fiscal 2017. Again, cost savings from its Project K and Zero-Based Budgeting (ZBB) have been supporting renovation, innovation, brand support and margins for Kellogg. Kraft Heinz realized cumulative savings of approximately $1.45 billion from its Integration Program as of second-quarter 2017.
Amazon's foray into brick-and-mortar stores is now likely to step up fresh price wars for these companies’ products, both in stores and online. Amazon’s as much as 43% price cut on Whole Foods’ products on its first day as the owner of this organic grocer could be distressing for the entire food industry. Prices of a number of products, ranging from avocados to organic chicken, were cut.
Despite traditional packaged food companies taking a number of initiatives to boost sales, the weakness in this area continues. Amid this uproar, how these food biggies deal with the latest Amazon-Whole Foods merger is a wait-and-see story.
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