Early Signs of Headwinds Easing for Conagra, Which Should See Low-Single-Digit Sales Growth Return

Revenue segments as reported by the company.

Grocery & Snacks

Refrigerated & Frozen

International

Foodservice

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Conagra’s business has evolved over the years, from a conglomerate, reinforced by its 2012 acquisition of Ralcorp that bolstered its private-label exposure (later divested at half the purchase price), to its present focus on brands and driving growth through increased value (rather than just boosting volume). However, food is competitive, and we don’t think it has a portfolio of leading brands and entrenched retailer relationships to warrant pricing power, a handicap relative to branded peers. In addition, it spends notably less in product development and marketing, claiming more efficient spending closes the gap. But we remain skeptical and don’t believe it will capitalize on consumer trends more effectively than competitors. A subscale portfolio lacking strong brands combined with continued underspending is likely to leave it an industry laggard, in our view.

With frozen foods (primarily meals and vegetables) constituting more than a third of sales, it’s the most important category for Conagra, though we think it’ll struggle to stand out amid intense competition. On one hand, frozen has been one of the fastest growing grocery categories in the US, with consumers attracted to the convenience afforded by this fare. On the other hand, it is rife with competition, and consumers tend to seek out value products. Recent volume declines following inflation-related price increases lend support that consumers are reluctant to pay up for frozen products, especially as they see them as lower quality and less nutritious than fresh alternatives. We see these trends as only intensifying the competitiveness. Further, we see vegetables (frozen or fresh) as largely commodities. This leads to private label holding the dominant and still-growing share in frozen vegetables. Thus, while frozen meals and vegetables outperformed during the pandemic, we see more meager low-single-digit growth going forward.

Conagra’s snack business generates nearly a quarter of company sales, but it remains a small player in the industry. Despite the inherent growth in the category, we think the company will struggle to stand out given the dominant position and heavy category investment by peers.

Business Strategy & Outlook

We don’t think Conagra has an economic moat. For food producers, brand intangible assets and cost advantage are the typical sources of a durable competitive advantage. We think Conagra’s brands lack sufficient leadership across several product categories to amass an entrenched standing with retail partners. Additionally, we do not see evidence of a cost advantage, as direct operating margins lag the median for food producers.

Quantitatively, returns on invested capital don’t evidence a moat. Following the 2018 acquisition of Pinnacle Foods, returns on invested capital, including goodwill, averaged in the mid-single-digit range from fiscal 2019-23. We forecast an improvement to nearly 8% over the next five years, but the very narrow 100-basis-point margin above our estimate for its cost of capital is far too small to give us enough comfort that Conagra possesses a competitive edge.

Brand intangibles are most often observed through pricing power, dominant market share, and/or entrenched retailer/restaurant relationships.

Frozen food, including vegetables and ready meals, is Conagra’s single most important product category at more than a third of sales. In frozen vegetables, its Birds Eye brand holds the largest market share of 27%, according to Euromonitor. But we see a few challenges. First, since 2018, it has lost more than 200 basis points of market share, while number two-brand, Green Giant, and private label have gained 60 and 250 basis points, respectively. Second, as evidenced by private-label’s gains, we think frozen vegetables are largely a commodity product, unlike more value-added or processed foods. Lastly, frozen vegetables compete against both shelf stable and fresh alternatives, with the latter benefitting from consumer trends toward fresher food. Together, these headwinds reduce our confidence in Conagra’s competitive advantage in this category.

Although not commoditized, frozen ready meals face their own challenges in a crowded market filled with diverse products. This leads to fragmentation making it difficult for any one competitor to emerge as dominant and requiring constant investment to stay current. Conagra’s top brand in the category, Marie Callendar’s, sits in fourth place by market share at under 5%−less than half of Nestle’s Stouffers brand’s share. Other brands, including Healthy Choice (number seven), Banquet (number nine), and Birds Eye (number 13), give Conagra the second-largest company share at 16%, but this is insufficient to form a competitive advantage.

Snacks, shelf stable ready meals, and dessert mixes round out Conagra’s other larger product categories. In snacks and dessert mixes, we think Conagra has some brands with decent share, but it falls well behind category leaders. Conagra looks more competitive in shelf stable ready meals, especially with its number two-positioned Chef Boyardee brand. Unfortunately, the shelf stable ready meal market is one-tenth the size of the frozen ready meal market, making it far less important for retailers. So, even if we thought that Conagra had a moat on shelf-stable ready meal shelves, it’s not enough for us to award a companywide moat.

Our no-moat rating is further supported by our view that Conagra underspends on research and development and advertising. Its 0.5% of sales on research and development and 2.3% of sales on advertising falls far short of the 0.8% and 4.6% spent by peers, respectively. While the company claims more efficient research and development and advertising allows them to generate a higher return on a smaller investment, we’re skeptical. We think fewer “shots on goal” challenges Conagra’s ability to effectively respond to evolving consumer trends in a timely fashion as well as to ensure its products stand out on a crowded shelf. Declining market share for many of its brands provides credence to our stance.

We also don’t see evidence of a cost advantage. Cost advantages from economies of scale are difficult without significant mass, particularly in a similar set of categories, which we don’t think Conagra has at its size. Economies of scope are possible for consumer-packaged food companies if we see efficiencies in distribution. However, we don’t think that’s the case for Conagra, particularly as heavy exposure to frozen food adds shipping complexities. Additionally, our forecast for Conagra’s direct operating margin over the next five years of 21% falls short of the industry median in the mid-20% range.

None

Economic Moat

Conagra Brands

Conagra Brands, Inc. engages in the manufacture and sale of processed and packaged foods. It operates through the following segments: Grocery and Snacks, Refrigerated and Frozen, International, and Foodservice. The Grocery and Snacks segment includes branded, shelf stable food products sold in various retail channels in the United States. The Refrigerated and Frozen segment is composed of branded, temperature-controlled food products sold in various retail channels in the United States. The International segment offers branded food products in various temperature states, sold in various retail and foodservice channels outside of the United States. The Foodservice segment focuses on branded and customized food products, including meals, entrees, sauces, and a variety of custom-manufactured culinary products packaged for sale to restaurants and other foodservice establishments in the United States. The company was founded by Alva Kinney and Frank Little in 1919 and is headquartered in Chicago, IL.

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