Conagra Brands delivered a strong third quarter performance with net sales up 8.5% to $2.8bn and net income up 37.8% to $281.4m. Although the outlook for COVID-19 is improving in many regions, including enhanced mobility, the company expects demand for food-at-home to remain elevated, underpinning future growth.
Four years’ worth of incremental new buyers
Given the unprecedented trialling opportunity the pandemic created for its products, the equivalent of more than four years’ worth of incremental new buyers, Conagra expects to emerge from the crisis with structurally higher volumes and share. The work it has undertaken to reshape and modernise its portfolio of staples, frozen foods and snacks over the last five years, has enabled it to drive repeat usage among the millions of new households it has attracted over the last year. Product innovation has been central to this, with recent results indicating a high level of consumer acceptance for newly launched products.
Expecting two-year growth rate of over 7% in Q4
Based on these factors, the company restated its financial outlook for 2022. It expects organic net sales growth (3-year CAGR ending fiscal 2022) of 1-2%. In the fourth quarter, it expects organic net sales to decline 10-12% as it laps growth of 21.5% last year. This represents a two-year growth rate of 7-9.5%. The company views four factors as key to continued elevated growth.
Source: Conagra Brands
1. Major disruptive events drive permanent behavioural shifts
During the 2008-2009 recession, Conagra saw consumers shift from primarily consuming meals away-from-home to at-home. Although this change in behaviour was not unexpected, given the focus on saving money, it lasted beyond the economic recovery. The company believes that part of the reason for the change in behaviour was driven by the formation of new habits. Given that consumers are almost 400 days into the current pandemic, it expects the new at-home eating habits will remain even as the crisis eases.
Data from states that have been the most open, based on the mobility of residents, reveals that two-year growth retail sales growth rates are materially higher than pre-pandemic and remain consistent as states reopen and stay open. This reflects comments earlier this month from McCormick which had seen a similar pattern in Australia and China.
2. Online shoppers offer superior lifetime value
Winning with online shoppers is important for Conagra, especially given that the channel over-indexes to younger millennial consumers. Despite a slowing rate of growth, ecommerce sales were up 89% year-on-year in Q3. The growth in digital sales has been one of the defining features of the pandemic. The company noted that 50% of new ecommerce buyers continue to buy online, with 20% becoming heavy users. Online shoppers also generally have higher brand loyalty than those shopping in store. All of this demonstrates the opportunity for superior lifetime value that’s being generated by its ecommerce investments.
3. The adoption of remote work provides a structural increase in the demand for frozen food
As one of its core categories, frozen food is expected to continue delivering strong growth as a greater proportion of people spend more time working from home. For some, remote working is expected to be permanent. This will impact lunch and dinner occasions, the meals with the largest exposure to frozen foods. Conagra’s portfolio is well-placed to capitalise on this, given the focus on convenient meals and side dishes.
4. Entertainment consumption has moved to the home
Conagra believes that consumers have made a significant and lasting shift to at-home entertainment. Data from NPD indicates an increase of over 40% in the use of streaming services and time spent in viewing digital video. When consumers, particularly younger generations, move their entertainment to the home, they increase the number of at-home snacking occasions. Research from the Pew Center, indicates that while 3% of consumers have left urban areas for smaller cities and suburbs, this figure rises to 9% for 18 to 29 year olds. In many of these suburbs, there are fewer options for eating away from home.
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