Much of the Q&A session during the firm’s Q2 earnings call on Wednesday was devoted to the law of diminishing returns on trade spending and innovation that is not delivering, with Deutsche Bank analyst Eric Katzman wondering how large CPG firms could grow in a climate of “disappointing volume and more promotions”.
The bigger players are struggling to come up with appealing new products, and when they fail they fall back on promotional spending
He added: “It seems like the bigger players are just struggling to come up with good products that are appealing, and when those fail they go back to the easy method of just promoting more. So what … is the answer to such a tough situation? “
Gamgort responded: “There is a lot of discussion that I have seen about promotional efficiency or inefficiency and yeah, the more that the industry promotes the lower efficiency there is going to be. It’s almost a given… We’re looking at this industry right now as very much a zero sum game. We're not seeing growth in total.”
But he added: “We’re reluctantly having to match some of the promotion that’s out there. We have to be price competitive, otherwise we start losing market share and we know what happens in that situation. But we’ve been really, really focused on building internal capabilities about spending that money in a smarter way.
“If [they have] got to make this quarter over these next months, people are leaning on promotion very much because there is a delayed reaction to any marketing.”
Recent big food M&A: Either the prices were too high or they weren’t a great strategic fit
In the medium term, further consolidation will help drive efficiencies; while in the long term, stronger innovation will be key to growth, he said.
“The environment is right for consolidation in the food industry: A combination of lack of growth, the relatively low cost of financing, no easy answer into where you go next, emerging markets aren’t delivering the performance they once did… Even some of the specialty retailers are soft on their performance, so there’s not such an easy answer.”
However, not all of the big deals in 2014 made strategic sense, he said: “One of the things that I’ve noticed is that of the last seven sizeable transactions that have been done in the food industry in 2014, five were U.S. based public companies.
“If you look at the impact, the acquired stock price was either flat or down upon announcement of the acquisition and that’s quite a departure from what we’ve seen in the previous four or five years.
“And what it says to me is that either the prices were too high or they weren’t a great strategic fit. So I think our discipline remains around, is it the right strategic fit, which means does it make us a better company over the long term?”
Learnings from aborted Hillshire deal
Asked how the Hillshire Brands saga (Hillshire recently dropped its bid to acquire Pinnacle after it was itself acquired by Tyson Foods), had impacted the business, he said: “If we lost any momentum, it was… because customers weren’t sure for a period of time exactly who they were going to be dealing with in the back half of the year.
“[We also lost some momentum] in the world of productivity where we work with some external partners … and then also in M&A, where we lost some weeks of some momentum that we had there.”
But he added: “The positive thing is we’ve taken that $163m [break fee paid to Pinnacle after the Hillshire deal fell through] and we put it to really good use.”
Q2 highlights
Pinnacle’s second quarter revenue rose 8.6% to $617.8m, below analysts’ estimates for $629.3m. Net earnings rose to $35.6m compared with a net loss of $31.8m in Q2, 2013.
Based in Parsippany, New Jersey, Pinnacle Foods is a leader in many shelf stable and frozen foods segments with a stable of brands including Wish-Bone and Western dressings (acquired from Unilever)Duncan Hines baking mixes and frostings, Vlasic pickles, Mrs. Butterworth's and Log Cabin table syrups, Armour canned meats, Open Pit BBQ sauces, Freshlike frozen vegetables, Birds Eye Voila! frozen meals, Hungry-Man frozen dinners and entrees, and Aunt Jemima frozen breakfasts.