ConAgra's Cost Reduction Bet: Catching Up Quickly Enough?

In late December, ConAgra reported its latest quarterly results, suggesting they were "very positive" with their overall direction for the fiscal year. Cost-reduction initiatives were a major driver of these results. On the call, ConAgra noted, "Our consumer-foods supply chain team continues to execute against a long runway of cost-reduction opportunities. Taking into account the first half of cost-savings performance, we currently estimate that cost savings will be in the range of $300 million for the full year." What's most interesting to note is that ConAgra is not just leveraging these savings to drive EPS improvement directly, but also to fuel top-line growth. To wit, "While a portion of these incremental savings drives earnings improvement, a portion also offsets surgical pricing adjustments and provides fuel for accelerating investments in marketing and innovation."

ConAgra remains confident of the pipeline of savings opportunities that lie in front of it, and noted on the call that it is "confident in the ability of our supply chain team to continue its consistent delivery of cost savings." Our own benchmark analysis of ConAgra's relative procurement and supply chain sophistication suggest it's in the top 10-15% of its peers, yet its operation is still not as sophisticated as perennial early adopters, including Kraft, Nestle, and PepsiCo. From a procurement and supply chain perspective, however, ConAgra compares favorably to peer companies in the consumer-foods area such as Sara Lee, Unilever, and Wrigley, and is ahead of companies such as Heinz (which our research suggests is catching up very quickly), Pillsbury, General Mills, and many others.

What separates top-performing organizations in the CPG and consumer-foods world? Leaders nearly always focus on cost reduction across both their direct and indirect supply chains, and leverage more advanced cost-reduction and risk-mitigation strategies, including commodity hedging and optimization (for transportation and, often, other spend areas). They also often turn to suppliers for innovation (my favorite story is how the idea behind the upside-down ketchup squeeze bottle, which has been an important factor in driving Heinz' Ketchup sales in recent years, came from a supplier). But creative -- and often green -- packaging is only one procurement and supplier management focus area that can reduce costs and fuel sales. Clearly, ConAgra -- and its peers -- still has significant runway left to apply creative procurement across a range of initiatives to further reduce costs and drive innovation.

Jason Busch

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