Taking the Post
With the Post buy, it now sells Post's popular Honey Bunches of Oats and other iconic cereal brands such as Post Raisin Bran, Grape-Nuts, Spoon Size Shredded Wheat, Pebbles and Post Selects.
"People are trading down in these recessionary times, but some consumers like their brands," said John Staszak, an analyst with Argus Research.
Ralcorp sells to Wal-Mart and other grocery stores, drug stores and food-service customers.
Based on the results of a recent shopper survey, Information Resources Inc. (IRI) expects private-label foods to have a merry holiday.
"Some 91% said they would try to put private-label products on their dinner table this holiday season," said IRI president Thom Blischok. That compares with the less than 40% of shoppers polled last year who said they would buy private labels over the holidays.
Store brands, sold under various labels, account for one of every five items sold in U.S. supermarkets, drug chains and mass-merchandise chains, says the Private Label Manufacturing Association.
According to a recent report by the Nielsen Co., private-label sales in all such retail channels in the last year tallied $80 billion, up from $72 billion a year ago. Grocery private-label sales are up 10%.
Lately, the private-label industry has been growing by more than the usual single digits of prior years as consumers trade down.
Business really picked up this summer, says Blischok.
While private-label dollar volumes had been going up in tandem with food-price increases (more than 6% annually), unit growth had been fairly flat.
That changed in the third quarter. Unit share of private-label products sold in retail outlets rose one share point, from 16% to 17%. (Dollar volume share is above 20%.), Blischok says.
"It's very significant," Blischok said of the unit-volume uptick.
However, private-label dry cereal sales are relatively flat, with a little over 13% unit-volume market share, according to research.
Ralcorp operated under the cover of its customers' store brands. Now, it will be the power behind a national brand, Post.
Will the two types of businesses compete with each other? Ralcorp and industry observers say there is room for both.
"The retailer that wins big time is the retailer who balances the role of national brands with private-label brands," Blischok said.
Brands are a different kind of business than private labels. They are backed by heavy advertising and marketing, which is the main reason they are 20% to 30% more expensive than private-label products. However, margins are higher than private labels.
"Kraft wasn't investing in the (Post) brand sufficiently, so it's an opportunity for Ralcorp to build and develop the brand and take advantage of a time when people are purchasing more food for home," Staszak said.
He says Ralcorp will need to invest heavily in promoting and advertising the cereals and compete for shelf space with other cereal brands.
Why change course? Scott Monette, Ralcorp's corporate vice president, says the Post deal was attractive from a financial standpoint. In addition, the company is comfortable with the cereal business.
Though Post Foods' management came over the aisle to Ralcorp, Ralcorp itself is no stranger to cereals. Cereals, crackers and cookies together comprise its largest category, followed by frozen bakery goods, dressings, sauces and snack items.
Years ago, Ralcorp, which was spun off from Ralston Purina in 1994, sold national brands Chex cereal and Beech-Nut baby food before selling them to focus on private labels.
If Ralcorp invests in the Post cereals brands, "it should do well," Staszak said.
BB&T Capital Markets analyst Heather Jones added, "Their biggest core competency is in cereal."
The Post cereal deal sets the stage for more branded acquisitions, Jones says.
Growth By Acquisition
It is not that Ralcorp's growth in private-label food products has not been decent. Sales have grown at a double-digit clip the last few years.
A lot of the growth comes as it scooped up smaller players in the private-label business. In the last decade, it has bought more than 20 outfits, about a dozen in the last five years. Bloomfield Bakers came onboard last year.
Post Foods, with more than $1 billion in annual sales, was Ralcorp's largest acquisition, not to mention its only national brand addition. It bumped up revenue by more than 40%.
Post added about $180.5 million to fiscal fourth-quarter sales ended September 30. Sales in the quarter totaled $265.3 million, while profit from the year-ago period grew 41% to $0.83 a share.
Management expects the Post business to add $0.44 a share in profit during the first full year of ownership. For the fiscal year ending in September, analysts tracked by Thomson Reuters estimate profit will climb 14% to $4.12 a share.
From the December 5, 2008, Prepared Foods e-Flash