Morningstar | While Smucker's premium brands should keep growing, challenges remain in its legacy products.
J.M. Smucker’s iconic food, coffee, and pet food brands have given the firm a narrow moat. With a presence in on-trend categories like peanut butter, premium at-home coffee, and high-end pet food and snacks, Smucker has offset category erosion in some of its legacy businesses. Its sought-after brands and record as a proven supplier make it a valued partner for retailers, providing a platform for distributing new, on-trend products. However, the firm’s intangible asset is threatened by difficult market dynamics in the center of the grocery store, which continues to see brand values erode as competition rises and consumers increasingly favor fresh items.The 2015 Big Heart Pet Brands acquisition represented a transformational shift in Smucker’s sales mix; after the subsequent purchase of Ainsworth and divestiture of its U.S. baking unit, Smucker will derive nearly 40% of its pro forma sales from pet food. Big Heart has benefited from customers’ increasing willingness to spend on premium pet products, driving growth and boosting margins through differentiation. Still, Smucker paid dearly for Big Heart, a 13 times EBITDA level that we believed would be difficult to justify, a fear validated by a $177 million 2018 impairment.Smucker faces a fast-changing consumer landscape but has leveraged its brands to keep abreast of trends. After struggling in K-Cup coffee sales, Smucker’s introduction of Dunkin’ Donuts-branded pods (sold under license from Dunkin’ Brands) has boosted the company’s share in the sector. The Jif brand’s extension into snack bars, other nut butters, and powders has allowed Smucker to capitalize on increasing consumer demand for protein (especially plant-based). Big Heart has used innovation and built conventional grocery distribution for its more premium items. Still, intense center-of-store competition and retailers’ unquenchable thirst for growth have diminished the value of brands across the industry. This, combined with the rapidly evolving consumer palate, will force Smucker to negotiate fast-changing consumer tastes to offset erosion in its legacy brands and keep its privileged position with retailers.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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