Del Monte Foods (NYSE: DLM) makes foods for both people and their pets, selling its products primarily through U.S. grocery stores. The Company’s pet food and pet snacks brands include Meow Mix, Kibbles ‘n Bits, Milk-Bone, 9Lives, Pup-Peroni, Gravy Train, Nature’s Recipe, Canine Carry-Outs and other brand names and its food brands include Del Monte, Contadina, S&W, College Inn and other brand names. Its facilities consist of 17 production facilities and 10 distribution centers in the United States, as well as two production facilities in Mexico and one production facility in Venezuela.
As with many consumer goods manufacturers, Del Monte depends heavily on Walmart. The world's largest retailer, Walmart is by far the company's primary customer, generating 31% of the food maker's sales.
Aside from the Walmart Effect, Del Monte has faced pressure to lower its prices from an increasingly consolidating supermarket industry (fewer customers means less leverage for Del Monte). End consumers are also increasing the consumption of private label goods as a substitute for Del Monte.
Del Monte Foods Company produces, distributes and markets processed food and pet products for the United States retail market. Roughly 95% of net sales come from the U.S. retail market, while just 5% came from foreign exports .
Fourth Quarter Fiscal 2010 Results (ended May 2, 2010)
Del Monte Foods reported net sales of $954.0 million for the quarter, compared to $1,057.4 million in the year-ago quarter, a decrease of 9.8%. Income from continuing operations for the quarter was $63.3 million, or $0.31 diluted earnings per share from continuing operations (EPS), compared to $68.8 million, or $0.35 EPS in the previous year.
The 9.8% decrease in net sales for the quarter largely reflects lower volume due to one extra week in the fourth quarter fiscal 2009 (~6.1%). Aside from 14th week, unit volume was lower in Consumer Products and Pet Products. In fiscal 2010, Consumer Products shifted the focus of its Vegetable promotion to the second and third quarters, compared to the fourth quarter a year ago. In Pet Products, a year ago, Dry Pet Food benefitted from competitive pricing and supply issues. The fourth quarter results also reflected a 64% increase in marketing investment.
Del Monte's Consumer Products participate in a market of approximately $7 billion of retail sales annually. The fruit category grew by over 4% in fiscal 2009 as compared to fiscal 2008 driven by pricing. The vegetable category increased by approximately 10% driven by pricing. The tomato category grew approximately 11% driven by pricing. Broth category sales are up approximately 11% driven by pricing and new product innovation. Vegetable, tomato and broth categories also benefitted from the trend to more in-home meal preparation. Branded food manufacturers typically establish pricing and lead innovation in the processed food categories in which our products compete. Private label products as a group represented 32.3%, 44.5% and 40.6% of processed fruit, vegetable and tomato sales, respectively, in fiscal 2009.
Del Monte's Pet Products participate in a market of approximately $19 billion of retail sales annually. This market experienced an increase of approximately 15% from fiscal 2008 to fiscal 2009. The categories are dry and wet dog food, dry and wet cat food, and pet snacks. Growth in these categories will continue to be fueled by higher spending due to the growing importance of pets as part of the family, increased rates of value-added new pet product entries, and pricing. Over half of all American households own a dog or a cat. In fiscal 2009, private label products accounted for 12.6% of the total market share in the Pet Products market, with the rest of the market divided primarily among a small number of large, multi-national manufacturers.
The primary raw materials used by Del Monte are energy (including natural gas), aluminum cans, fruits, vegetables, tomatoes, tuna, grains (including corn), sugar, spices, meats, meat by-products, soybean meal, and fats. The rising demand for ethanol has pushed corn prices higher, resulting in a dampened growth for the firm. Corn is by far the primary feestock for this fuel.
Del Monte's brand name products compete against private label or "store brand" products, which are often thought as less expensive imitations of brand name products (ex. CVS-brand pain medicine, instead of Tylenol or Advil). This negative stigma of private labels is fading, posing a serious threat to Del Monte's market share in processed food.
Supermarkets are consolidating and as behemoths such as Wal-Mart Stores (WMT), replace smaller, local supermarkets, Del Monte's customers become fewer and fewer. Walmart already accounted for 31% of sales in fiscal 2007  , but as this ratio grows, so will Del-Monte's reliance on Wal-Mart. As the supermarket industry becomes increasingly consolidated and a few big players demand ever lower prices, the firm will be forced to agree to more price cuts in their products, or else risk losing a significant portion of its business.
Del Monte has seen impressive growth in its Pet Products sector. This can be attributed to U.S. pet owners increased spending on their pets. As the firm faces volatile raw materials prices and a fairly saturated U.S. food market, the company has depended on its Pet Products segment to stimulate firm-wide growth.
Del Monte faces fierce competition from cheaper private labels as well as increasing pressure to lower prices from supermarket giants like Wal-Mart Stores (WMT). These competitive pressures are compounded by volatile prices in key inputs like corn and tuna.
The firm is somewhat unique in that it makes pet food along side brand name processed foods. Nonetheless, many of Del Monte's competitors have larger revenues and market capitalization, giving them greater financial resources than Del Monte.