Hormel Foods – 2021 Strategic Update – 29 April 2021
Disclaimer
The information, material and content contained in this transcript (“Content”) is for information purposes only and
does not constitute advice of any type or a trade recommendation and should not form the basis of any investment
decision. This transcript has been edited by Third Bridge and may differ from the audio recording of the Interview.
Third Bridge Group Limited and its affiliates (together “Third Bridge”) make no representation and accept no liability
for the Content or for any errors, omissions or inaccuracies in respect of it. The views of the specialist expressed in the
Content are those of the specialist and they are not endorsed by, nor do they represent the opinion of, Third Bridge.
Third Bridge reserves all copyright, intellectual and other property rights in the Content. Any modification,
reformatting, copying, displaying, distributing, transmitting, publishing, licensing, creating derivative works from,
transferring or selling any Content is strictly prohibited.
Specialist:
Title:
Moderator: Nyree Hinton (NH), Third Bridge Sector Analyst
Stephen Koven (SK)
Former VP, Digital Experience at Hormel Foods Corp
Agenda:
1. Hormel Foods' (NYSE: HRL) Planters snack nuts acquisition
2. US retail and foodservice – operating dynamics
3. Poultry input cost inflation
4. Shelf-stable product innovation
5. Profitability outlook
Contents
Q: Could you give an overview of the food manufacturing and meat processing industry as it relates to Hormel
3
Foods? What is the uniqueness of how Hormel participates in poultry, meat and other packaged goods?
Q: What were the key industry trends pre-coronavirus and how have they changed since?
Q: Which trends do you think are temporary vs long term?
4
4
Q: Which division of Hormel has driven the company’s growth over the last few years? How has growth shifted
5
across its divisions or categories?
Q: What do you think about the growth across bacon and pepperoni internationally? Does Hormel perceive
5
an opportunity in the different Asian markets?
Q: What is your assessment of Hormel managing the steep drop-off in foodservice? How difficult might it be
6
to shift supply capacity to retail from foodservice so suddenly?
Q: What was Hormel’s rationale for the February 2021-announced Planters acquisition from Kraft Heinz
Q: What do you expect from the strength of Hormel’s grocery or retail segment post-pandemic?
6
6
Q: What does it mean for a core ingredient to be labelled an allergen? Sesame was recently labelled an allergen.
Is there typically a lot of lobbying going back and forth to not have one of your products labelled an allergen?
7
What do you think about those dynamics?
Q: What cost pressures or inflationary dynamics were there during your time at Hormel and how have they
8
developed since, given the pure escalation of different input costs?
Q: Where is the flexibility in switching retailer? Do you think retailers will be able to hold CPG costs steady as
they improve their supply chains and efficiency? Do you think it is still in everyone’s interests to reduce costs
9
and raise prices, even if they’re in a favourable operating environment?
Q: What are the CPG players thinking about? The retailers control the product and there are rising input costs.
9
What strategic investments do you think CPG players should make to address these structural issues?
Q: Where does Hormel fit in the health and wellness trend, in terms of its products and investments?
10
Q: What are Hormel’s plant-based meat offerings like? How is it innovating across categories such as bacon
10
and pepperoni to appeal to a healthier consumer?
Q: Do you think Hormel is a bit late to the game, given that it’s just now rolling out a plant-based poultry
10
offering? Do you think the company doesn’t perceive the risk of entering this category as worthwhile?
Q: What do you expect to be the best- and worst-case scenarios for Hormel over the next 1-2 years? Is there
10
anything you think investors commonly overlook regarding Hormel?
Hormel Foods – 2021 Strategic Update
Transcription begins at 00:00:01 of the recorded material
NH: Welcome to Third Bridge Forum’s Interview, entitled Hormel Foods – 2021 Strategic Update. I’m Nyree
Hinton. I will be facilitating today’s Interview with Mr Stephen Koven, former VP Digital Experience at
Hormel Foods Corp.
Stephen, before we get started today’s Interview, please state I agree or I disagree to the following statement:
You understand the definition of material non-public information and agree not to disclose any such
information, or any other information which is confidential, during this Interview.
SK: Correct, yes.
NH: Thank you, Stephen. Could you start by giving the audience an overview of your background and the
various roles you’ve held in the industry?
SK: I started my CPG experience back in 2002, when I worked at Clorox as an intern while I was going to the
Kellogg School of Management. After graduating there, I went full-time at Clorox and worked in the brand
department, per se, for them. Then, a little over a year later, I moved to the company of Henkel, staying in
consumer packaged goods, and worked there roughly 15 years, progressing into higher-level roles in brand
management and a focus on digital marketing and e-commerce. When Henkel moved to Connecticut, when
they bought some products, I stayed in Arizona and worked for a private equity-owned pet food and treat
company, in a sales and e-commerce role. Then, when that company sold, there was an opening at Hormel
Foods for the role of Digital Experience. That was a role that was an enterprise role, to manage things
including e-commerce, shopper marketing, data management and science, and digital marketing, from a
centre of excellence standpoint. About six months ago, I left there and currently work at Crossmark. I’m the
Vice President of Omnichannel & E-Commerce. Crossmark is one of the three largest sales and marketing
agencies, sometimes referred to as a broker. That company that I work for, and others that are brokers, work
in between clients and retailers to help support different functions, if it’s calling on retailers at their
headquarters, doing in-store resets or sampling, managing e-commerce, the things that maybe want to be
outsourced or they need help on to be successful at retail. That is a quick summary of me.
[00:03:08]
Q: Could you give an overview of the food manufacturing and meat processing industry as it relates to Hormel
Foods? What is the uniqueness of how Hormel participates in poultry, meat and other packaged goods?
SK: Big picture, Hormel Foods is a company that both works in the ambient space and the refrigerated space,
which impacts supply chain. Obviously, when I say supply chain, it’s transportation of the product to the end
consumer through retail, with that in the sense that you have things that are shelf-stable, that are easier to
ship and have a longer shelf life. Then, you have the refrigerated, which is more expensive to ship and which
has a shorter shelf life. About almost half-and-half, roughly, is between these two types of food products. It is a
food-only company. Others that are potentially competitors, let’s say Smucker’s, for instance, does participate
in pet, but Hormel is purely food. From a standpoint of its types of clients or customers, it participates both in
what we are traditionally in, as in shoppers at retail, but it also has a big presence in foodservice. Foodservice
can cover things from making sure food is available in restaurants, universities, hospitals or corporate centres.
Vs some of its peers in the food space, it has, I would say, a slightly larger foodservice presence. With the
pandemic, and as we’re moving out of it somewhat, that has had some ebbs and flows. Obviously, foodservice
generally got hammered per se, as everything shut down due to lockdowns, and now it’s been opening up,
Private and confidential 3
which is bringing growth back into that space for the industry.
As you can imagine, and as you know, when foodservice-type activities came down, there was obviously a
surge, a huge spike, in the March-April time frame last year, as people went directly to stores to get their food
and did a lot of stocking up. We’re in that period right now, as obviously, we’re anniversarying that large spike,
so that stocking-up period. The business also within Hormel is mostly meat. Roughly, when the Planters
integration is finalised, 25% of the business will be non-meat-based, and the remaining 75% will have some
meat component. If we think about the largest segments or divisions within Hormel, Hormel obviously has
what’s called refrigerated foods. That is a combination of both foodservice and retail, refrigerated items
including branded products. That would be Hormel bacon or hams. It would also include other branded
products in refrigerated meats, like Applegate and Sadler’s, more recent acquisitions to Hormel.
Another division within the company is the Jennie-O division, which is solely focused on all things turkey.
They have both retail and foodservice. The division called grocery products is a combination of both branded
products of Hormel on it and others, brands like Skippy, the soon-to-be Planters, which would be, in essence,
the ambient products, the shelf-stable ones, obviously having a different distribution and shelf life. The
international division is another division with the company, which is obviously outside the US, including
Canada, China, Australia, Korea and such. A combination of local production and/or joint ventures and/or
licensing makes up that business. Those are the biggest divisions within the company, excluding one that I’d
highlight also which falls under the grocery product division, which is the MegaMex joint venture. That is
where we have the rights to brands like Herdez for Mexico, and other US-based brands like Chi-Chi’s salsas
and La Victoria salsa and Holy Guacamole. Those are maintained in a joint venture under the grocery products
division, and that is managed outside of the local headquarters, in the Los Angeles area vs being based in
Austin, Minnesota.
[00:08:49]
Q: What were the key industry trends pre-coronavirus and how have they changed since?
SK: One trend before and after that I’d highlight is private label. Private label continues to be an important
part of the category for the retailer, due to margin pressures and creating extra loyalty, because of the cost of
consumers shifting. There’s just going to be, pre-pandemic and post-pandemic, in my opinion, increased focus
on that category of products, that would impact food producers more so than, let’s say, electronic phones or
deodorants per se. Food has a lower barrier to entry for some categories, and also is not as differentiated vs
consumer electronics. That is one trend that I was watching very closely before the pandemic hit. Obviously,
with the pandemic, due to shortages, consumers did try new products, and that leads me also to what also
happened due to the pandemic, which is e-commerce.
E-commerce has become substantially larger due to COVID. The industry was roughly around 4-5%, based on
public information for e-commerce sales for grocery, and with the lockdowns and the concerns of safety and
other things, the business of e-commerce grocery looks to be over 10% last year. It will continue to grow, as
now consumers become more comfortable with this activity of obtaining groceries, they’re seeing the benefit of
simplicity, ease, things of that nature. In parallel, the retail side has made big investments, if it’s Walmart,
Kroger, the companies like Instacart, Shipt. All of these investments, and I use that term broadly, have made it
easier for consumers to do e-commerce delivery or pick-up, and that facilitates, again, another trend that was
happening pre-COVID and, in essence, has accelerated substantially due to COVID. What we’re seeing, in my
opinion, is that it is not coming down too much and will continue to be a growing area of the market.
[00:12:00]
Q: Which trends do you think are temporary vs long term?
Private and confidential 4
SK: Temporary, I’d put in the bucket of some of the things that are due to COVID right now. There’s been a
little bit of increased snacking, at-home meal preparation, I think a little bit more of a shift to potentially
unhealthier foods. I think, as the market or the world per se opens up more, we’ll see a shift from family meals,
as people go back into the office and establish new routines, but routines take time to evolve. The snacking at
home will change. There’ll be a bit more snacking at work, snacking on the go, and so that will change what
types of snacks and who’s going to benefit from that. I also think that, due to COVID, the strain, both mentally
and physically, on consumers, people not able to exercise as much, to also gather, the general public is
unhealthier. That’s a short-term thing. I see that creating a pivot, where there probably will be a focus on
healthier eating, healthier lifestyles. As consumers realise, when they finally now start getting back into the
gym or visiting with a physician, that this was not good for their health, they’re probably going to need to make
some choices, in my opinion, to get healthier, to counter the unfortunate impact, both mentally and physically,
of the COVID situation we’ve just gone through.
[00:14:13]
Q: Which division of Hormel has driven the company’s growth over the last few years? How has growth
shifted across its divisions or categories?
SK: It has been a little bit of a balance model, as the organisation has created. For instance, there has been a
lot of growth in the turkey division. Most recently, for those that cover, obviously, Hormel has seen that, in
recent years, has not been the growth engine. Things like foodservice have in the past also been growth
engines. It’s a little bit of a mix. I wouldn’t say, in my opinion, there has consistently been one thing that’s
always done well. There’s an ebb and flow. There’s been a great run on the powerful brand of Spam. I forget
how many years, but it’s been multiple years that it has continued to grow and add value to the company, but
that was maybe not always the case. I can’t think off the top of my head, over 10-20 years, a sure winner per se,
but it’s a balance model of different divisions contributing when others maybe just have different struggles.
I would say, in general, looking a bit more forward, you’ve got some key areas that make up the company.
There’s a tremendous amount of bacon creation or production. That’s been a very on-trend business. “How
high is high?” is really the question to be answered. When you think about pepperoni, that’s been a
tremendous business for Hormel, both retail, that’s had, if you look over the last 10 years, great success, but
it’s also benefited with pizza consumption in the US at retail or at restaurants, those types of toppings that
come along with the growth in pizza, especially what occurred during COVID. There are ones that are, in
essence, a little bit you’ve got to just maximise that, and it’s not going to be a high growth. If it’s some of the
canned items, a chilli, a beef stew brand like Dinty Moore, those are ones that, up until pre-COVID, centre
store was not really the growth in the retail space was, but it was the perimeter. Long answer, I apologise, but
in essence, there have been highs and lows between the different divisions. I think where its focus is for where
its potential growth could be, the key areas for focus could be pepperoni, bacon, foodservice, those are areas.
Where’s the future growth there?
[00:18:01]
Q: What do you think about the growth across bacon and pepperoni internationally? Does Hormel perceive an
opportunity in the different Asian markets?
SK: Yes. Obviously, public information, in the sense that part of the plan is to continue to find growth
opportunities within the international space. For instance, Spam is locally produced in China, and so that
allows for the flexibility for catering to the localised tastes. I do see that there is growth opportunity there, and
the approach of doing it locally-based vs making one only and shipping it internationally, I would say, in my
opinion, is a positive way of doing it.
Private and confidential 5
[00:19:30]
Q: What is your assessment of Hormel managing the steep drop-off in foodservice? How difficult might it be
to shift supply capacity to retail from foodservice so suddenly?
SK: It’s a hard answer. I hate to provide that as the opening, but it’s just that we don’t know. Yesterday, I
think it was, or this morning, McDonald’s talked about that they just got back to pre-COVID levels. I think it’s
really just so based on the opening-up, so in essence, state by state, county by county almost, but I do think
that it will over time. The question is, when will it get back to those normal levels, the original levels? My
opinion is we still have some way to go to get to the business travel. It’s now roughly 20%, so the foodservice
going into the hotels and airports is, at a minimum, down 20% roughly. I think it’s a matter of when vs if, and
Hormel is going to continue to invest in that space. Pre-COVID, it was where there was lots of growth, as
consumers have historically become more prone to eating out. Lives are busy and this is one way to capture
time, by getting the food delivered or picked up at store, or going out to a restaurant. The long term I’m able
more confidently, per se, to speak to. The short term is more difficult, because it is so dependent on as these
things open up.
[00:21:52]
Q: What was Hormel’s rationale for the February 2021-announced Planters acquisition from Kraft Heinz?
What are your thoughts on that acquisition?
SK: This is just my outside opinion. I was not in the conversations regarding the purchase. I think Planters is
a very strong brand. It has a very dominant position in its space, and so there’s low risk on purchasing a
Planters-type business. That’s number one. Again, this is through the lens of Stephen here. Number two is it
compliments some of the efforts around their nut butter businesses of both Skippy and Justin’s, so there’s
some scale probably in cost efficiencies there. It does bring the organisation the benefit of getting into
different places. Number one is the peanut section for Planters is in a different section than the peanut butter
and jams, spreads, that are in a different section of retailers, so you’re now allowing Hormel to have access to a
different buyer at retail and categories, for cross-pollination.
Planters is at a lot of out-of-home convenience store distribution that is not as common with the line-up that
Hormel has. That brings a benefit to Hormel to get into new retailers with a presence, to create scale, to create
cross-pollination per se, of other products, so that’s a benefit. Those are some of the thinkings that are
intuited, that it’s a stable business, it has a pretty consistent cash flow. It obviously, over the years, has
somewhat stabilised, down from some of its peaks 4-5 years ago, based on what I’ve seen on public data, so for
them to be able to purchase this with lower-cost debts, it looks like a good opportunity for them to increase
scale and profitability. Based on the press release that was provided, it’s accretive to the company. That’s, I’d
say, how they’re probably thinking about it.
[00:24:38]
Q: What do you expect from the strength of Hormel’s grocery or retail segment post-pandemic?
SK: They’re in centre store. As we get back to maybe pre-COVID-type activities and eating habits, a canned
chilli, a canned beef stew, a processed meat like Spam, as that trajectory starts coming back, they’re going to
be under a lot of pressure long term, or even mid-term per se, again, my opinion, as consumers gravitate to
fresh snacking-type products, perimeter deli, ready-to-prepare foods. I would say that things have not
necessarily changed at the consumer level of wanting these more shelf-stable, meal-type products of chilli,
beef stew and a Spam-type product. Peanut butter is in a slightly better spot. Again, this is my opinion. It’s
plant-based, it’s a convenient way to get some protein from fats vs high carb, as people are more carb-sensitive
than they used to be. Skippy’s position in the marketplace is number two vs Jif. Jif has a bigger presence, a
bigger presence for advertising. Also, the category of peanut butter specifically is highly under pressure. It’s
Private and confidential 6
one of the most private label categories in the store, and so that’s going to also come as a pressure to the
organisation, and any brand that’s in the branded peanut butter space.
Then, finally, I think a macro issue with peanut butters is where their allergens end up, as the peanut allergy
epidemic, not pandemic but epidemic, in the US continues to, unfortunately, foster in newborns each year.
The most recent data I looked at was for 2017 online, and it’s continuing to increase. Unfortunately, what
happens with that is it takes out an entire family, sometimes, of being able to consume a peanut butter-type
product, because they could be sensitive to airborne aspects of the peanut butter, not just ingestion or it
touching their skin. That’s a headwind also that impacts that category. I see, within the grocery products
organisation, you have the benefit of the MegaMex partnership, which, as I mentioned, has the salsa, the
guacamole brands. That is something that has growth, in my mind. Those are growing spaces. Obviously, we
know, with demographic changes, higher Hispanic birth rates and the American palette expanding more into
salsas and Mexican food, and the growth of guacamole, that’s a nice opportunity for them to try to get some
growth of it. It does still have headwinds, though. Private label salsas, in-store creation of guacamole, is
something of a risk to that growth. Centre store, in a nutshell, is still going to have a lot of the same type of
headwinds that you had pre-COVID.
[00:29:19]
Q: What does it mean for a core ingredient to be labelled an allergen? Sesame was recently labelled an
allergen. Is there typically a lot of lobbying going back and forth to not have one of your products labelled an
allergen? What do you think about those dynamics?
SK: The allergens in the US, there are roughly nine that are needed to be on packaging. The sesame, as you
brought up, is the most recent one. They use a percentage of population affected by it to be making that
determination. The main thing that’s driven by the consumer is the incidences of people getting hurt, ending
up in the hospital or, worst-case, death. Because, in the US, we are becoming more prone, and no one knows
the exact reason newborns are being prone to some of these allergens, it’s made it more important to highlight
them on packaging, so people do not get hurt. Big picture on that is that this is a growing trend. This is not
something that has always been the same level of incident rates, and then there was lobbying or something
that made it more important. This is really driven by the consumer.
It’s just becoming a higher level of this as an issue. With that, it’s created more education and visibility within
schools, hospitals, our industry of CPGs, to ensure that there are things like cleaner lines, plants that don’t
have allergens, full product categories that are free of allergens. There’s a whole set of that if you go into
muesli aisles and the gluten-free section within a retailer, but that creates its own sub-market of allergen-free
products. I wouldn’t say there’s a tremendous amount of lobbying, per se, from the industry in the CPG side,
from what I’ve seen. The manufacturers, so if it’s a grower of sesame seeds, I see them trying to influence it
much more than the CPG. I think it’s the right thing for the industry to have this information more readily
available for the consumer to understand, because of the higher incidences or penetration of these allergens
with our consumers.
NH: What opportunities does that create for a company such as Hormel?
SK: With that, I think first is communicating well. If someone is in this space, it’s just making sure people
know, if it’s on their package, very clear information, understanding which allergens exist, on their e-
commerce product page. That opportunity then creates confidence for the purchase. There will be an allergen,
potentially. If it’s sesame for a soy-type product, maybe it’s a teriyaki with sesame seeds on it, that’s just going
to exist, there’s a market for that, but just making sure it’s clear to the consumer what’s in it and what’s not.
This can lead to growth to businesses that cater to this through mechanisms. One is highlighting that they do
have an allergen-free plant. That they’ve highlighted what is not in the plant can create an opportunity vs a
competitor to highlight it, because it is still an evolving space of communicating on a package what is or not
co-produced in the locations, so that’s an opportunity from just communication. The other opportunity is what
I mentioned, this growing sub-category of allergen-free products. That’s an opportunity for CPGs in this space
to create other offerings that don’t have a pine nut, a peanut, a sesame, an egg, a milk. Those types of things
Private and confidential 7
are an opportunity. Still more niche, I don’t want to say it’s going to be the majority of the category by any
stretch, but it is an opportunity to win a growing space that traditionally, right now, seems to be higher
margin, if you look at the price points, for instance, on an allergen-free chocolate chip vs one that is not.
[00:35:31]
Q: What cost pressures or inflationary dynamics were there during your time at Hormel and how have they
developed since, given the pure escalation of different input costs?
SK: From my observations, you’ve got traditionally the inputs in transportation as things that have inflation
in the traditional space, and a lot of times, those can be passed through. When we had the spike on cost of
distribution in the industry, because there were changes in regulations for trucking, those, generally speaking
as an industry, were passed on. There was the same thing with meat prices. The one thing, though, about meat
prices is pig, cow, chicken, those are not necessarily correlated. If you are, let’s say, a pork producer, and pork
prices, input prices, go up in the industry, generally, you’re able to show and push a price increase out. There
is obviously that timing difference between when you’re able to get the price increase executed and your P&L,
per se, getting hit, but generally, those types of price pressures or inflationary changes are able to be passed
through.
What’s new are some other costs. For instance, labour is always an ongoing cost, and always has some sort of
level of inflationary aspect to it. As everyone can see, what’s happening right now in the space is the movement
to higher minimum wages, the current impact of finding people to do jobs when there is a stimulus that could
actually be more financially advantageous to just stay out of a job. That is putting pressure on the industry to
find human resources to do these jobs, and I see that continuing, in my opinion, into the next couple of years.
The impact of, again, the minimum wage, but just as this market keeps up and people are hiring, trying to get
someone to a plant, you’re now with a short labour group trying to compete against other industries that are
paying well, that is something that is an inflationary risk to the industry. The other is, I would say, the cost of
doing business. I’m somewhat pivoting. This is not necessarily perfectly an inflationary-type true cost, but I
wanted to pivot to what’s happening at retail. Obviously, retailers are investing into e-commerce. That costs
money, for people to go to the store and pick things, if it’s that, or changing up their infrastructure to hold bags
of product ready to be put into a trunk, and they’re creating refrigerated sections at the front of the store.
All these infrastructure things, both physical and online, are costs that need to be borne either by the
manufacturer or the consumer, and so you’re seeing a lot of retail taxing occurring. One of them you’ve maybe
read about and seen is the taxing of the media side, of Walmart Connect saying, “We’d like your fair share of
media dollars to come to Walmart,” or Albertsons talking about their need for investment into their media
platform. These are incremental asks that were not around three years ago for the CPG space. This is not
something they’re saying to take from a trade budget. This is something saying, “I need your original trade, but
now I need you also to invest into our media platform.” How do the CPGs work within that? Do they shift from
other media that they’ve been spending, or not spending at all, because that brand just was not spending that
much on media? Is it coming out of some other bucket, or just hitting their bottom line? The industry is going
to have to figure it out. As retailers just really put a big push now out of COVID to get more media money,
where’s that going to come from? Is it going to be a shift? Is it going to be a hit to the bottom line? Is there
going to be a price increase to pay for it? It hasn’t been determined yet, but it is definitely coming full force
from the likes of Walmart, Albertsons. BJ’s just made an announcement on it, and so where is that going to
end up? It’s TBD.
NH: How much flexibility would you say a brand such as Hormel has to push back against some of its
customers when they come with these requests for other resources?
SK: It depends on a few factors. One is the company’s strength, and as I mentioned, as we all know, now with
Planters, it’s a bigger, stronger company. There’s a benefit to having a little bit more strength, market power.
At the opposite end, some of it could depend on category. It’s very known that, in the bacon category, there are
huge fluctuations on value pricing. It’s never easy to get a price increase, but it comes with the territory, per se.
It’s a little bit known. It’s not going to be a shocker. The ability of Hormel or any CPG right now to take price is
Private and confidential 8
a little bit more difficult as market consolidation continues. The strength of the big retailers continues, and so
that could stand them in a better position to try to hold cost down for their end consumer. It’s going to evolve,
but I’d say the retailer, in my mind, again, this is my opinion looking out, is going to have more strength to
push back on price increases. Is it material? Probably not, but if it’s a toss-up, I think the retailer is going to
have a little bit more strength in the longer term.
[00:43:38]
Q: Where is the flexibility in switching retailer? Do you think retailers will be able to hold CPG costs steady as
they improve their supply chains and efficiency? Do you think it is still in everyone’s interests to reduce costs
and raise prices, even if they’re in a favourable operating environment?
SK: Let me take the second question first. As retailers continue to invest in private label brands, it’s going to
be on a case-by-case business if they are able to scale investments in robotics and other efficiencies. If it’s to,
(1) take it to the bottom line, (2) redirect it to investments to compete in e-commerce, for instance, or against
other retailers, also, it could be investing in their brand. As we know, private label is not the one that I
originally saw when I was a young kid, which was a white label with black text. These are brands that are
bigger than other brands, the success Kroger has had, for instance. I think they also have the ability just to
take price down on the private label. We know price increases are going to increase sales. You mentioned it,
that it’s going to depend, but I do think all of those things are things that strengthen the retailer and the retail
private label brand.
As they get bigger, they get more scale, they get bigger opportunities to create a stronger brand and retail
experience, and that reduces consumer shifting between stores to get their products. That is especially true
with e-commerce. There’s lots of data out there that talks about the stickiness of orders. When someone’s in
through that app or that web ordering, it’s going to take a lot of effort for someone, maybe if they don’t find
their favourite canned item, to switch to just go get that somewhere else. That is why you’re seeing this huge
investment by Walmart, Kroger, Albertsons and others to ensure that they are competitive and winning in this
space, because they cannot wait for Amazon to get to the scale they want to, or it’d potentially be game over.
That does put more pressure, again, on the CPG industry.
[00:47:31]
Q: What are the CPG players thinking about? The retailers control the product and there are rising input
costs. What strategic investments do you think CPG players should make to address these structural issues?
SK: Great CPGs do the following three things, and some might focus more on others. (1) They build equity. In
the United States vs other countries, we do spend more and pay more for brands. CPGs that invest in brand
building are going to be able to weather this more. They’ll have that market power, the ability to push through
the price increase or to be on shelf, or to win the battle between their brand and private label, so equity. How
do you know if equity is being built? A key part of that is the marketing spend against it. (2) Innovation. We
have seen, in recent years, private labels starting to innovate themselves, but those that can continue to
innovate will create the reward and outpace the private label, hopefully be accretive in the effort, and so
innovation is important. The final thing is just scale, supply chain, cost optimisation. If you just focus on that,
you’re just a manufacturer, but to be a great CPG, you need to do the brand building and the innovations. Your
Procters, your Unilevers, if you look at what’s done really well for them over the years, it’s really balancing all
three of those for success.
Private and confidential 9
[00:49:58]
Q: Where does Hormel fit in the health and wellness trend, in terms of its products and investments?
SK: They’ve done, publicly, a good job of diversifying and moving away from the meat side. The acquisitions
of Skippy, Justin’s, have allowed them to move into what would be more considered healthier eating. The
development in historical growth, over many years of the Jennie-O division, is a healthier lifestyle-type
product. The products within the MegaMex joint venture of Holy Guacamole and the salsa brands are under
healthier living. Then, the pivoting of products like the Hormel brand Natural Choice gives them a small
business in the deli wall section. They do have, and continue to have, focus on that aspect. There is still
indulgence. As much as I mentioned that we’re all going to probably have to get healthier soon, consumers still
love the taste of bacon and love the taste of Spam. That still has a place in the eating habits of the US, but that
shift to healthier food, I see that continuing into the future.
[00:51:56]
Q: What are Hormel’s plant-based meat offerings like? How is it innovating across categories such as bacon
and pepperoni to appeal to a healthier consumer?
SK: Let me take first plant-based. They launched a brand in that space. I’m not as close to the exact public
information related to it, but that space is more dominated by other brands. I would say they’re a very minor
player in that. Your Beyond Meats, your Impossible-type brands, and then some of the legacy brands like
MorningStar, really, from my opinion, will be the end winners. That space continues to grow. I think it’s not a
fad, but I don’t see it being, in my opinion, the biggest category out there. I see it more of a niche category that
will take up a refrigerated section. Lower-performing items, those will get kicked out to make space for these
higher-margin, higher-price point items, but they’re still niche. One of the biggest drivers is the price point.
When you’ve got turkey, pork, beef, chicken, these are all competing against that usage occasion. The Beyond
Meats and Impossibles are playing less of a, or not at all, really, health aspect positioning. It’s the
sustainability-type aspect that is just not going to drive it into being a replacement, I’d say, for the turkey
business, which is on the smaller end of the meat category. I think it’ll have some growth, but it will not be, I
would say, that material.
[00:54:30]
Q: Do you think Hormel is a bit late to the game, given that it’s just now rolling out a plant-based poultry
offering? Do you think the company doesn’t perceive the risk of entering this category as worthwhile?
SK: I think it’s a hyper sensitive category right now, but how profitable can it become? It’s a growing category,
but how profitable, with the massive spend of Beyond Meat and Impossible and others trying to win there? It
could be a strategy, from my opinion, of just a wait-and-see. I do believe that it is, again, speaking for myself,
going to be a niche category. Is that a great place to go in, where the cost to execute is high and the rewards
aren’t material enough, are on the low side? It is going to take occasions out of all the other raw-meat
categories, so it’s a hole in the dam, per se, that there’s a leak from it, but it is a high-risk, moderate-return
space, in my mind.
[00:56:15]
Q: What do you expect to be the best- and worst-case scenarios for Hormel over the next 1-2 years? Is there
anything you think investors commonly overlook regarding Hormel?
Private and confidential 10
SK: I think Planters gives them some cushion, in the sense of the ebb and flow of what’s going to happen post-
COVID. It’s a very stable business. I think, for the investor community, it’s to watch things like how much is
being invested to build equity, watching innovations. Are they sticking or not? I would also say, that
foodservice business, where’s that going to land? I think those three things would be important things to focus
on for more of a long-term investor, from my opinion.
[00:57:32]
NH: Let me close by saying thank you, Stephen, for your input. Clients, if you would like to speak to Stephen
in a private call or meeting, please let your relationship manager know. Thank you again for joining Third
Bridge Forum's Interview today, this now concludes our meeting. Goodbye.
Transcription ends at 00:57:46 of the recorded material
Private and confidential 11