Ralcorp Holdings Inc. (NYSE: RAH) manufactures and distributes branded and private label food products in the mass merchandise, grocery, and foodservice channels. Ralcorp offers cereal products, crackers, cookies, frozen foods, breads, snacks, candy, and sauces. In the fiscal year ending September 30, 2010, Ralcorp recorded $4,049 million of net sales and $3,892 million for the fiscal year ending September 30, 2009. Net income was $209 million in FY2010 and $290 million in FY2009.  Although no single competitor competes with Ralcorp in all of its product categories, Kraft Foods, General Mills, and Kellogg Company are seen as its main competitors.
Ralcorp's main business strategy is growth through acquisition. Since 1997, Ralcorp has acquired 25 companies that manufacture private-brand, regional-brand or value-brand food products. In 2008, Ralcorp also acquired the third-largest ready-to-eat cereal manufacturer in the United States, Post Foods. 
In 2010, Ralcorp made several key acquisitions. On May 31, 2010, the Company acquired Canadian-based North American Baking Ltd., a leading manufacturer of private-brand specialty crackers in North America. Also in May 2010, Ralcorp acquired J.T. Bakeries Inc., a leading manufacturer of private-brand and co-branded gourmet crackers in North America. On June 25, 2010, the Company acquired Sepp’s Gourmet Foods Ltd., a leading manufacturer of foodservice and private-brand frozen griddle products. On July 27, 2010, Ralcorp acquired American Italian Pasta Company (AIPC), a leading manufacturer of store and regional brand dry pasta. 
Ralcorp is a producer of store brand foods and food service products. The Company sells products under individual labels to grocery, mass merchandise, and drug store retailers. Frozen bakery products are sold to in-store bakeries, restaurants and other food service customers.
Fiscal 2010 Results (ended September 30, 2010) 
Ralcorp recorded $4,049 million of net sales in the fiscal year ending September 30, 2010 and $3,892 million for the fiscal year ending September 30, 2009 which is a 4.09% increase. Net income was $209 million in FY2010 and $290 million in FY2009 which is a 5.89% decrease. Top line revenue growth was due to increased sales from acquisitions, but net earnings decreased due to negative impacts on margins.
|Net Sales (M)||$3,892||$4,049||+4.09%|
|Net Income (M)||$290||$209||-5.89%|
The negative margin impact was due to adjustments such as the absence of divested investment gains in FY2010 (included in FY2009 results), the impairment of goodwill and brand trademarks from acquisitions, merger and integration costs, and legal settlement costs related to plant closures. If these items are excluded, the adjusted diluted earnings per share increased 9% to $4.68 since Ralcorp benefited from acquisitions, higher base-business sales, lower raw material costs, fewer number of outstanding shares in FY2010.
The Branded Cereal Products segment includes the Post cereal business, which is manufactured and distributed under its own brand. Cereal brands include Honey Bunches of Oats, Pebbles, Shredded Wheat, Post Raisin Bran, and Honeycomb. In 2008, Ralcorp also acquired Post Foods, the third-largest ready-to-eat cereal producer in the United States. An internal sales staff and an independent sales agency manages sales in the grocery, mass merchandise, drugstore, and foodservice channels in the U.S., and a broker distribution systems manages the distribution internationally.
The Other Cereal Products segment includes private-brand and value-brand cereals, as well as nutritional bars and natural and organic specialty cookies, crackers, and cereals. Ready-to-eat cereals are currently produced at three manufacturing facilities and uses flaking, extrusion and shredding technologies to produce 45 different types of ready-to-eat cereal. Hot cereals include old-fashioned oatmeal, instant oatmeal, and 3 Minute Brand hot cereals which are all produced at one facility.
The Snacks, Sauces & Spreads segment includes the following products: crackers, cookie, snack nuts, candy, chips, sauces, and spreads.
Ralcorp produces cookies under the Rippin’ Good brand and crackers under the Ry Krisp and Champagne brands. In fiscal 2010, approximately 29% of the Snacks, Sauces & Spreads segment’s net sales was from crackers and cookies. The cracker and cookie business are produced to order, and production increases in the fall and winter as consumption increases. 
The snack nuts, candy and chips business produces a variety of jarred, canned and bagged snack nuts, chocolate candy, and corn-based snacks. Brands include Nutcracker, Flavor House, Hoody’s, and Medallion. In fiscal 2010, approximately 34% of the Snack, Sauces & Spreads segment’s net sales was snack nuts, candy, and chips. The snack nut and candy products are mostly produced to order and shipped directly to customers. Inventories are stored in warehouses during times of peak demand.
The sauces and spreads business includes dressings, syrups, peanut butter, jellies, salad dressings, sauces, and non-alcoholic drink mixes. In fiscal 2010, this business provided approximately 37% of the Snacks, Sauces & Spreads net sales. Approximately 86% of its net sales was to retail customers and the remaining 14% was to foodservice, contract and other customers.
The frozen bakery products segment includes pancakes, waffles, French toast, and dry mixes for bakery foods. This business uses both make to order and make to inventory production scheduling processes. Customers of this segment are foodservice customers such as large restaurant chains and distributors of foodservice products, retail grocery chains, and mass merchandisers. In fiscal 2010, approximately 36% of the business’s net sales was griddle products, 25% was breads, rolls and biscuits, 30% was dessert products and 9% represented frozen dough and dry mixes. Approximately 35% of its net sales was in the foodservice channel, 42% was to in-store bakeries and 23% was retail.
The Pasta segment produces approximately 300 different shapes and sizes of pasta products in bulk packages for institutional customers and individually-wrapped packages for retail consumers. The types of pasta produced include spaghetti, fettuccine, lasagna, and rigatoni. Brands include Pennsylvania Dutch, Heartland, Golden Grain, and Mueller’s. The two primary customer markets are the retail market and the institutional markets. The retail market includes grocery, mass merchandise, and drugstore channels that sell branded and private-brand pasta to consumers. The institutional market includes foodservice customers that supply restaurants, hotels, schools and hospitals and other food processors that use pasta as a food ingredient. In fiscal 2010, approximately 80% of sales in this segment was in the retail channel and 20% was institutional.
Ralcorp states that its main strategy of growth is through acquisition and growth in its base-business. Increases in net sales in fiscal 2010 compared to fiscal 2009 was the result of acquisitions and base-business growth. In 2010, Ralcorp acquired four companies--North American Baking Ltd., J.T. Bakeries Inc., Sepp’s Gourmet Foods Ltd., and American Italian Pasta Company (AIPC). Although Ralcorp saw top line revenue growth in fiscal 2010 compared to fiscal 2009, net earnings in fiscal 2010 of $208.8 million ($3.74 per diluted share) were down $81.6 million, This is due to factors such as the impairment of goodwill and brand trademarks, merger and integration costs, and legal settlement costs related to plant closures. Excluding these items, adjusted diluted earnings per share increased 9% to $4.68 due to higher base-business volumes, lower raw material costs, fewer number of outstanding shares in fiscal 2010. 
Each of the five business segments that Ralcorp competes in is a mature market with many competitors. Pricing and volume are down in 10 of the 12 categories in which Ralcorp competes.  Competitors engage in promotional discounting, and consumers are price sensitive due to the recent recession. Despite the demand for low prices, Ralcorp management plans to raise prices in every category except Post cereal. At the same time, competitors such as General Mills and Kelloggs are implementing list price increases of their products as well. Kraft began increasing its cookies and crackers product prices in 3Q 2010.  Ralcrop must respond strategically to its competitors' adjustments in product prices.
Ralcorp faces declining margins due to increasing commodity prices. Management indicated that input costs would be $200 million higher in FY2011 compared to FY2010 due to recent commodity inflation. Since commodities represent ~70% of RAH’s cost of goods sold, the $200 million increase in commodity costs would result in a 10% YoY increase in cost of good sold. Ralcorp plans to respond to these increasing commodity prices by increasing the list prices of its products.
While the products that Ralcorp offers are similar to these competitors, Ralcorp's brands focuses on private-label and value-label products. As a result, Ralcorp sustained a competitive advantage during the economic recession due to more competitive prices.
|Company||Revenues (M)||Net Income (M)||EPS|
|Ralcorp Holdings (RAH)||$4,049||$209||$3.79|
|J.M. Smucker Company (SJM)||$4,605||$494||$4.15|
|General Mills (GIS)||$14,797||$1,531||$2.32|
|Kellogg Company (K)||$12,575||$1,212||$3.17|
|Kraft Foods (KFT)||$40,386||$3,021||$2.04|
Data from company FY 2010 10-K.