Campbell Soup Company (NYSE: CPB) is the world's largest producer of soup with a 60% market share in the $4 billion soup market. Campbell's has leading market share positions in a number of food industry categories with products such as soups, sauces, snack foods, baked goods, and beverages. Campbell's products are sold in over 120 countries around the world.
Campbell's owns a diverse portfolio of food brands including Prego pasta sauces, Pace Mexican food sauces, V8 beverages, and Pepperidge Farm. As the undisputed leader in the soup category, Campbell's must continue to expand and diversify its soup offerings in order to prevent losing its dominant market share. Healthy foods are becoming increasingly popular and Campbell's has introduced a line of low-sodium products in order to attract consumers to this market, but it will be imperative for the company to adapt to evolving trends in consumer habits.
The biggest challenge for Campbell's lies in its continued growth. Campbell's is dependent on the relatively mature and slow growth US market for the majority of its sales. However, it is investing increasingly in Russia and China, which account for more than 50% of worldwide soup consumption. The company expects to be profitable in these two countries by 2014, after investing $50 million annually in these two markets since the mid-2000's and forming a strategic partnership with Coca-Cola Hellenic Bottling Company (NYSE: CCH) to distribute Campbell’s soup and broth products in Russia.
Founded in 1869 as the "Joseph A. Campbell Preserve Company," Campbell Soup Company is one of the largest food producers in the world, with product sales in over 120 countries. Led by its flagship brands Campbell's, Pace, Prego, Swanson, StockPot, V8, and Pepperidge Farm, the company holds the #1 or #2 position in each of the food product categories or segments in which it operates. In 2010, the company posted revenues of $7.68 billion, a 1% increase from 2009; net income rose 14.7% to $844 million.
In order to maintain sales growth, Campbell Soup Company is focusing on product expansion in three areas: simple meals, baked snacks and healthy beverages. The company plans to improve its product lines in these areas through the introduction of new healthier and more convenient products, as well as expansion of these lines in both developed and emerging markets. Additionally, Campbell Soup Company is investing in large emerging markets abroad, in particular China and Russia.
Campbell's U.S. Soup, Sauces and Beverages segment generates the bulk of the company's revenues and operating income. U.S. Soup, Sauces and Beverages include products such as Campbell’s condensed and ready-to-serve soups; Swanson broth and canned poultry; Prego pasta sauce; Pace Mexican sauce; Campbell’s Chunky chili; Campbell’s canned pasta, gravies, and beans; Campbell’s Supper Bakes meal kits; V8 juice and juice drinks as well as Campbell’s tomato juice. The company's 2010 market share in the "wet soup" market was 63.6%.
Campbell's Baking and Snacking segment includes, Pepperidge Farm cookies, crackers (such as goldfish), bakery, and frozen products in U.S. retail. The segment also includes Campbell's Arnott’s of Australia which is the largest biscuit and second largest snack producer in the country. Arnott's also has a significant presences in the Asia Pacific region.
The International Soup, Sauces and Beverages segment includes the soup, sauce and beverage businesses outside of the United States, including Europe, Mexico, Latin America, the Asia Pacific region and the retail business in Canada. Campbell's sells the Erasco and Heisse Tasse soups in Germany, Liebig and Royco soups in France, Devos Lemmens mayonnaise and cold sauces and Campbell’s and Royco soups in Belgium, and Bla° Band soups and sauces in Sweden. In Asia Pacific, the company markets it's Campbell’s soup and stock, Swanson broths and V8 beverages. In Canada, operations include Habitant and Campbell’s soups, Prego pasta sauce, V8 beverages and certain Pepperidge Farm products.
The North America Foodservice includes Campbell's Away From Home operations which distributes its products to restaurants, schools, colleges & universities, health care, convenience stores, vending, and delis in the United States and Canada.
Campbell Soup Company's products are generally resold to consumers through retail food chains, mass discounters, mass merchandisers, club stores, convenience stores, drug stores and other retail, commercial and non-commercial establishments. Campbell's largest customer is Wal-Mart (WMT) which accounted for accounted for approximately 18% of the company’s consolidated net sales during fiscal 2010, 2009 and 16% during fiscal 2008. No other customer accounts for more than 10% of Campbell's net sales.
The shift to healthy living in recent years has affected two different groups of Campbell's customers. The younger consumer group has been shifting towards soup because of its lower calorie content which qualifies it has a healthy meal alternative. The younger, "on-the-go", low-calorie conscious consumers have helped Campbell's gain 70% of the microwaveable, ready-to-serve soup category. On the other hand, baby boomers are more concerned with sodium content because of America's obesity epidemic and accompanying high blood pressure. Baby boomers comprise the majority of Campbell's consumer base, and, because of the baby boomers' dieting trends, Campbell's, as well as other food companies, have had to adjust its product line in order to adapt to the health conscious, lower-sodium diets. Campbell's has developed several new products, including Select Harvest and Healthy Request soups in order to try and win over the more mature age group.
The success of Campbell's low-sodium soups will be important for holding onto the majority of the soup market. Since soup is traditionally known to have very high sodium content compared to other processed foods, Campbell's has responded by reducing the sodium content in its soups and marketing the health benefits of its products.
Besides sodium, Campbell's has also focused on other aspects of its soups. As of 2010, 30% of Campbell's soups offer a full serving of vegetables, 36% have 80 calories or less, while half contain no MSG. The company hopes that these healthier offerings will help gain market share among younger, more health conscious consumers.baby boomers, low-sodium products are pivotal to Campbell's long term success. The majority of baby boomers' diets are comprised of low sodium foods. High cholesterol, attributed to high levels of sodium intake, is the number one diagnosed health condition for the baby boomer generation.
Campbell Soup Company has relied on the success of its soups for over 125 years. In 2006, soup sales made up 55% of total sales and a total of 65% of profits. The condensed style soup made up 15% of total soup sales alone. In recent years, Campbell's has been promoting their other branches, such as Baking and Snacking and International Soups and Sauces, in order to produce more stable profits from diverse product segments, thus mitigating the effect of declining sales growth from mature legacy products. From 2004 to 2005, the Baking and Snacking segment experienced a 19% increase in earnings, International Soups and Sauces went through a 12% increase and the Other category went through a 9% increase in earnings.
Although Campbell's has a steady foothold in the American soup market, its international sector lags far behind many other major food producers and distributors. Campbell's has lower international exposure than its competitors, which is directly reflected in its slow international growth, with Campbell's global growth rate being about 1.5% behind that of its peers. However, Campbell's has renewed its focus on the emerging markets of Russia and China, which combined account for 50% of Campbell's total international soup sales. Furthermore, international exposure helped bolster Campbell's total revenues during the financial crisis as sales in Russia and China remained stable in 2008. Though profits remain low in these regions as a result of the high capital expenditures necessary to establish business, the company has made significant inroads and continues to invest.
In early 2011, Campbell announced a new joint venture with Swire Pacific. Swire has been Campbell's distribution partner in China since 2007 but the new venture is expected to increase the efficacy and permanency of this partnership. China is the world's largest soup market with nearly 355 billion servings of soup consumed annually, with nearly all of them being homemade.
The established long term growth plan for Campbell's is focused primarily on expanding organically rather than through further acquisitions. Organic growth is when a company attempts to expand by simply increasing output and enhancing sales, and essentially represents the company’s true core growth. Organic growth can be a good indicator of how well Campbell's management uses their resources to expand profits without relying on acquisitions, mergers, or takeovers. Plans by Campbell's to grow organically are likely to be realized in the form of long run gains in revenue.
Campbell's organic growth plan has kept Campbell's above the U.S. competition, but with low international exposure and a slowing soup market, accretive earnings addition from organic growth will prove problematic. As the U.S. soup segment becomes exhausted, Campbell's will lack further means for long term growth.
Recent moves, however, may signify a shift in strategy. As of June 30, 2010, Campbell's had sold $400 million of seven-year bonds, with proceeds being tagged for general corporate purposes including repaying debts and possibly financing future acquisitions. The company has said that it is aggressively seeking takeover opportunities, and with the company's increased financial flexibility, analysts are expecting the company to make an acquisition in the near future. Campbell's last acquisition was in 2009 when the company bought bread maker Ecce Panis.
Furthermore, Campbell’s management, at the request of major insider stakeholders, has authorized and executed a number of large share repurchasing programs in order to decrease the total number of common shares outstanding in Campbell’s Soup Company. This has resulted in artificially higher per share earnings figures for the company despite much lower actual gains in net income for the company as a whole, masking the otherwise inordinately low internal earnings growth generated by Campbell’s.
Campbell's uses a number of different products in order to produce, package, and deliver its soups. In the past, Campbell's has been able to keep production costs low on account of its economies of scale, but continued increases in prices for these commodities may exert negative pressure on gross margins.
In order to produce their soups, Campbell's needs products such as vegetables, tomato paste, beef and poultry. Price increases for these food products would be affected by bad weather, rising gas prices or changes to government-sponsored agricultural programs. Bad weather can contribute to a bad growing season and make these raw materials more expensive due to scarcity. Rising gas prices will increase transportation costs and ultimately increase the price of the soup itself. If the government decides to stop, or decrease, farm subsidies, the price of input ingredients will increase. Also, changes to import or export taxes could increase transport costs, which would directly lead to increases in soup prices.
In addition to soup ingredients, Campbell's uses a variety of metal, glass and paper to package its products. Price increases to these raw materials directly relate to soup product pricing. Prices would be affected by volatile oil prices and scarcity.
Campbell's main competitor is General Mills' Progresso soup brand. Progresso has low-sodium, Ready-to-Serve and Rich and Hearty soups, which directly mirror Campbell's Healthy Request, microwaveable/Soup at Hand and Chunky soups. Progresso's low-sodium soups were released shortly before Campbell's and have been successful, thus posing a challenge for Campbell's marketing team. Campbell Soup Company can stay ahead of competitors if it can adjust to meet new consumer demands, such as healthier products.
Campbell's faces an extremely competitive market because of the similarities between each soup producer. Campbell's will have to maintain its gourmet soup reputation, as well as continue to develop new soups to distinguish itself from Progresso and other smaller soup makers.
Generic soup brands are not a pressing threat to Campbell's because of the company’s ability to keep production costs very low as a result of its size. This allows Campbell's to price their soup products only 20- 25% higher than generic brands while maintaining a high level of quality. Campbell's production costs would be affected by a rise in produce costs, as well as volatile gas prices. If those prices rise dramatically, then generic soup brands would be yet another fierce competitor in the already extremely competitive soup market.
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Chart 4. Source: Company Data