With a Brand Intangible Asset Eluding Post, We Think the Business Is at Risk of Consumer Trade Down

Senior Equity Analyst

Rebecca Scheuneman

Post has a unique portfolio of businesses. After spinning off its majority stake in the fast-growing BellRing Brands in March 2022, nearly half of its sales mix is cereal, which is highly profitable, but where volume growth has proved elusive. The other half of its portfolio consists primarily of egg and potato products, which possess better growth profiles but carry low profit margins. We believe a competitive edge continues to evade Post, as it has not demonstrated strong brand equities, preferred relationships with customers, or a cost advantage, which are the most likely moat sources for a packaged food company.

The cereal business has been experiencing declining per capita consumption (prior to the pandemic) as consumers have shifted away from processed, high-sugar, high-carbohydrate fare. Adding to the challenge, no-moat Post, the third-largest player, has had to compete for shelf-space with market leaders narrow-moat General Mills and wide-moat Kellogg. That said, Post’s cereal business is very profitable, with EBITDA margins around the low- to mid-20s and low-30s for the U.S. and European businesses, respectively. 

The refrigerated segments (54% of 2022 sales, with 36% food service and 18% retail) consist primarily of egg and potato products, side dishes, cheese, and sausage sold under the Bob Evans and Simply Potatoes brands. Despite more attractive growth prospects than cereal (growing 1%-2% versus cereal's modest declines), agricultural commodities are difficult to differentiate and do not command price premiums (and ultimately could fall victim to consumer trade down against a weaker economic backdrop). As a result, this segment has relatively low EBITDA margins (16%-18%) and does not offer the firm a competitive advantage, in our view. 

Avian influenza has spread across North America in 2022, and in Post's March-ended fiscal second quarter, it experienced outbreaks at two of its egg-laying facilities in Nebraska. Post was forced to cull 10% of its flock, creating the need to buy eggs on the spot market in order to fill demand. Per management, the event had a negligible impact on profits, but as the virus is not contained, further outbreaks could occur.

Business Strategy & Outlook

Although Post Holdings possesses some well-recognized brands, we believe that the lack of consistent pricing power, failure to dominate most categories, the commoditized nature of some product categories (namely eggs and egg products, its second-largest category at 35% of fiscal 2022 revenue, excluding BellRing), and the firm’s inability to consistently report economic profits all point to the absence of a competitive advantage, leading to our no-moat rating.

A brand-based intangible asset for Post would be evidenced by pricing power and/or market dominance in its most important categories. Cereal is Post’s largest product category, accounting for 44% of company revenue. In the U.S. (where about 80% of the business resides), Post is the third-largest player with 15.5% market share in 2022 according to Euromonitor, behind narrow-moat General Mills' 26.9% and wide-moat Kellogg's 25.4% shares. In the U.K. (the remaining 20%), Post is the number-two player with 12.7% market share, behind Kellogg's 27.4% slice, and holds the top selling brand, Weetabix. We see evidence of pricing power in a handful of Post's cereal brands, such as Honey Bunches of Oats, Pebbles, Grape Nuts, and Honeycomb, which sell for $0.18-$0.25 per ounce at Walmart, similar to the $0.17-$0.30 ounce for other leading brands sold by General Mills and Kellogg. But we estimate these brands make up less than 15% of total company sales, with most of Post's cereal revenue composed of private label, brands without pricing power, and the firm’s value-positioned umbrella brand Malt-O-Meal, which sells a variety of bagged cereals for an average price of $0.15 per ounce, generally in line with Walmart’s Great Value brand at $0.12-$0.18.

Post’s second-largest product category is eggs and egg products (35% of fiscal 2022 sales). We believe this is a space that is hard to differentiate and thus fails to suggest the firm has amassed a brand-based intangible asset driven moat. We estimate that in a normalized environment (excluding pandemic-related disruption) about 80% of these products are sold in the food-service and ingredient channels, with the remainder sold at retail. Although Post was the sixth-largest U.S. egg producer in 2021 according to WATT Global Media, Post reports that it is the largest provider of value-added eggs to the food-service channel. Post’s egg products are designed to save time and labor for its food-service clients, such as liquid eggs to eliminate the need for cracking as well as eggs that are precooked, hard-cooked, shelled, and diced. However, we believe that it is extremely difficult to develop brand equity with agricultural commodities, as they are essentially undifferentiated from competitive products and therefore difficult to maintain a competitive edge. For example, we rate both Tyson Foods and Pilgrim’s Pride as no-moat, given the concentration of commodified offerings within each of their mixes. In the retail channel, Post sells shell eggs, Safest Choice pasteurized eggs, All Whites liquid egg whites, Better’n Eggs no-cholesterol liquid eggs, and Egg Beaters, which it acquired from Conagra for $50 million. These products exhibit minimal price variance among brands, as consumers tend to make purchase decisions based on price, as differentiation and value-added features are hard to come by. For example, the liquid egg category is dominated by private label, which holds just under 50% share.

In addition to eggs, the refrigerated segments consist of prepared side dishes (primarily potatoes) sold in the food-service and retail channels, as well as cheese and sausage sold at retail. However, as these products are largely agricultural commodities, and minimally differentiated, we believe Post does not possess brand intangible assets in this category, either. At retail, Post sells prepared potatoes and other side dishes under the Bob Evans and Simply Potatoes brands. Our price checks indicate that these brands sell at a similar prices as competing brands. The lack of pricing power indicates a lack of a brand intangible asset, in our view. These segments (food service and refrigerated retail) report relatively low levels of profitability--low to midteens EBITDA margins, much lower than the firm’s other segments, and on the low end of packaged food companies in general. We view this as additional evidence of a lack of competitive advantage.

Another source of competitive advantage could be entrenched relationships with customers, either retailers or food-service operators. We believe if CPG companies are dominant in categories that are important to their customers because of their size, growth, or profitability, they could possess competitive advantages via strategic partner status. However, we believe that Post has not reached this status in either the retail or the food-service channel. The cereal category does not elevate Post’s status with its retail partners for several reasons. First, according to the BLS, cereal only accounts for 2% of consumers' food and beverage spending, which in our view is not significant enough to make it a strategically important category for retailers. Furthermore, the category is shrinking as a percentage of overall grocery spending, which we believe also serves to lower the importance of the category for retailers. While eggs are growing as a percentage of total consumer food and beverage spending, the category currently represents only about 1.5%. Furthermore, brands are not important to the category, which is dominated by private label. While Post is a top provider of eggs and potatoes to the food-service industry, the commoditized nature of these products makes it very difficult to differentiate its offerings. Also, these categories represent a small portion of food-service sales. 

The firm could also potentially carve out a moat with a cost advantage. A cost advantage is typically underpinned by scale (buying power, manufacturing processes, economies of scope, route density, and advertising). Post's structure as a decentralized holding company results in higher selling, general, and administrative expenditures (14%-16% of sales compared with the 8% peer average), which makes a cost advantage unlikely. Furthermore, within the CPG space, cost advantage typically exists in combination with another moat source, such as intangible asset, which we believe Post does not possess. A cost advantage would likely be demonstrated with superior profitability. While comparisons are not necessarily apples-to-apples given participation in different categories, in general, Post’s 12% average long-term operating margin is well below that of food manufacturers with cost advantages, which range from 18% to 20%.

Further evidence supporting our conclusion that Post lacks a competitive advantage is that the company has consistently failed to earn an economic profit (return on invested capital that exceeds the firm's weighted average cost of capital). The firm has reported economic losses in seven of the last 10 years. ROICs including goodwill have ranged from 2% to 7%, generally below our 6% estimate of the firm’s cost of capital, and we forecast additional economic losses in most years of our forecast.

None

Economic Moat

Post Holdings

Post Holdings, Inc. operates as a consumer packaged goods holding company. The firm engages in the operation of center-of-the-store, refrigerated, food service, food ingredient, active nutrition, and private brand food categories. It operates through the following segments: Post Consumer Brands, Weetabix, Foodservice, Refrigerated Retail and BellRing Brands. The Post Consumer Brands segment manufactures, markets, and sells branded and private label ready-to-eat (RTE) cereal and hot cereal products. The Weetabix segment focuses on the marketing and distribution of branded and private label RTE cereal products. The Foodservice segment includes egg and potato products. The Refrigerated Retail segment produces and/or distributes egg products, sausage, side dishes, cheese, and other refrigerated products to retail and foodservice customers. The BellRing Brands segment consists of ready-to-drink (RTD) protein shakes, other RTD beverages, powders, and nutrition bars. The company was founded by Charles William Post in 1895 and is headquartered in St. Louis, MO.

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Post Holdings, Inc. is a consumer-packaged goods holding company, which engages in the operation of center-of-the-store, refrigerated, foodservice, food ingredient, active nutrition, and private brand food categories. It operates through the following segments: Post Consumer Brands, Weetabix, Foodservice, and Refrigerated Retail. The Post Consumer Brands segment manufactures, markets, and sells branded and private label ready-to-eat (RTE) cereal and hot cereal products. The Weetabix segment focuses on the marketing and distribution of branded and private label RTE cereal products. The Foodservice segment includes egg and potato products. The Refrigerated Retail segment involves the production and distribution of egg products, sausage, side dishes, cheese, and other refrigerated products to retail and foodservice customers. The company was founded by Charles William Post in 1895 and is headquartered in St. Louis, MO.

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