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Under Pressure, Packaged Food Firms Seek New Shelf Space

Erin Lash, CFA

Erin Lash: The packaged-food industry has faced a plethora of challenges over the last several years, including rampant cost inflation, soft consumer spending, and retailer consolidation that's propped up sales of private-label products. In an effort to combat these challenges, packaged-food firms have invested behind product innovation and marketing support. However, they continue to be challenged as consumers shop the perimeter of the store as opposed to center-of-the-store categories.

The common message we heard at the Consumer Analyst Group of New York conference recently was that packaged-food firms are investing and working with retailers to position their products in alternative locations throughout the grocery store. For one, Hershey's (HSY) management group discussed positioning its confectionary offerings underneath checkouts, in between self-checkouts, and at curbside-pickup locations, which we think will ultimately drive sales of the products longer term. However, we are not expecting a meaningful improvement in their financial performance, near term, as a result of these efforts.

While valuations in the packaged-food industry aren't overly attractive currently, we would suggest investors gravitate [toward] and keep an eye on wide-moat names like Hershey and McCormick (MKC), which possess strong brand intangible assets that afford significant pricing power, longer term. [Investors should] look to build a position in these names at a more attractive valuation.