Morningstar | No-Moat Smucker Ramping Marketing Investments in Hope of Combating Secular Headwinds
Given persistent secular headwinds and a loss of pricing power, we believe Smucker does not possess a moat, either via its brand intangible assets or entrenched retail relationships. Our analysis shows that over the past few years, Smucker has lost relative pricing power in categories that represent most of its revenue. While Smucker does have leading positions in a few categories (fruit spreads, peanut butter, oils), they represent only a low-single-digit percentage of total food sales, which we believe is insufficient for a competitive advantage.Smucker faces significant revenue headwinds. Its food segment (20% of profit) is under pressure as consumer preferences shift to fresh, unprocessed foods. While the company is attempting to offset this pressure with new products more aligned with consumer trends, such as on-the-go snacking, it will take a few years for these smaller brands to be large enough to offset the 80% of the segment that is under pressure, by our estimate. The coffee (36%) and pet (33%) segments have more attractive growth profiles, but Smucker’s poor positioning in these categories has resulted in market share losses over the past few years. In both segments, the company is overexposed to shrinking/slow-growth niches while underexposed to faster-growing areas. We believe 60% of the coffee segment and 66% of the pet segment are exposed to off-trend products and are therefore losing share. However, the firm recently acquired the Rachael Ray Nutrish brand, which is in the high-growth premium segment and has significant growth potential as it expands from dog food to cat food. In time, this may help the firm stabilize the pet segment.Despite these pressures, we’re encouraged that management has committed to a significant step-up in marketing spending to modernize its capabilities, from 5.7% of revenue to 7%. We believe the firm will focus these investments on the small pockets of growth in its portfolio to offset the headwinds facing most of the portfolio.Smucker (J.M.) manufactures and markets food and beverage products. The company's principal products are coffee, dog food, pet snacks, cat food, peanut butter, fruit spreads, frozen handheld products, shortening and oils, portion control products, juices and beverages, and flour and baking ingredients. The company has four reportable segments: U.S. Retail Coffee, U.S. Retail Consumer Foods, and U.S. Retail Pet Foods, and International and Away From Home. The U.S. retail market segments represent the sales of food and beverage products to consumers through retail outlets in North America. The International and Away From Home segment represents sales outside of the U.S. retail market segments.
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