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Supermarkets' Revival Skips the Top Store-Brand Supplier

18/04/2021 4:29pm

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By Annie Gasparro 

Grocery sales boomed throughout the pandemic. One of supermarkets' biggest and least-known suppliers missed out.

TreeHouse Foods Inc., based in Oak Brook, Ill., is the nation's largest manufacturer of store-brand foods. Its low prices and variety helped make it a growing threat to packaged-food giants such as Kraft Heinz Co., General Mills Inc. and Kellogg Co. over the past decade.

When Covid-19 disrupted the U.S. food sector, however, TreeHouse's strengths became liabilities, the company's top executives said, preventing it from benefiting as much as other grocery suppliers during the pandemic. Over the past year, TreeHouse ran into more capacity constraints and supply-chain problems than well-known brands because of coronavirus outbreaks. Cost cuts had to be delayed while labor, packaging, ingredients and freight got pricier. Not prepared to market its products online, TreeHouse fell behind as more consumers took their grocery shopping to e-commerce platforms.

"We had built this supply chain designed for tremendous efficiency but very low volatility," TreeHouse Chief Executive Steve Oakland said in an interview. "When the pandemic hit, we had complexity meet volatility."

The company faces pressure from an activist investor. Mr. Oakland said he is investing in technology and slimming down the company's unwieldy operations, aiming to reverse TreeHouse's fortunes as the pandemic eases.

TreeHouse makes 30 kinds of food for dozens of retailers, sold under store brands like Walmart Inc.'s Great Value macaroni and cheese and Whole Foods' 365 Everyday Value organic ground coffee. Those supermarket giants, and others such as Kroger Co., Albertsons Cos. and Costco Wholesale Corp., in recent years have invested heavily in such store brands, saying higher-quality and unique store-branded products help recruit shoppers and keep them coming back. They are also more profitable for retailers.

Grocery stores typically don't operate their own factories, relying instead on TreeHouse and other third parties to make items. For years, the formula worked: Heading into the pandemic, sales of store-branded goods grew at twice the rate of name-brand products, helped by grocery chains' push to sell more of them, and improve the chains' own profit margins.

Covid-19 changed all that. Stay-at-home orders and restaurant closures shifted the bulk of consumers' food shopping toward grocery stores. National brands, like Kraft Heinz, General Mills and Kellogg, quickly enlisted third-party factories to make more of their products and help meet higher demand. In their own plants, they stopped making certain products to maximize bestsellers and keep manufacturing lines moving.

TreeHouse couldn't do either. The company, Mr. Oakland said, makes a fraction of the dozens of flavors and sizes that national brands do, so there were fewer options to cut back in order to gain efficiency. The cuts made by TreeHouse cost it market share.

In frozen waffles, TreeHouse temporarily cut flavored ones, like chocolate chip, to focus on making the basics. The leading brand, Kellogg's Eggo, suspended production of more obscure varieties and continued selling popular flavors like chocolate chip. TreeHouse's frozen-waffle sales took a hit as a result, Mr. Oakland said.

TreeHouse also couldn't hire third-party manufacturers to increase production because it was too expensive and complicated, given the many retailers TreeHouse serves, former TreeHouse executives said.

"Private label lost share in many, many categories, and that is good news for big brands," Kraft Heinz Chief Executive Miguel Patricio said in a February interview. "That's something we don't see vanishing when the pandemic is over."

The greater availability of national food brands during the pandemic helped them win more shelf space from private-label products, Mr. Patricio said.

TreeHouse's branded rivals also got a boost as consumers' shift to online grocery shopping generated a decade's worth of e-commerce sales in a single year, according to private-label consulting firm Daymon Worldwide.

Price comparisons -- where private-label foods often win consumers when set side by side on shelves next to more expensive branded products -- can be harder for consumers to do online, said Daymon's senior vice president of strategy advisory, Aimee Becker.

Private brands' share of grocery sales inched down last year to about 18% of sales -- ending a decadelong rising streak, according to market research firm Nielsen. TreeHouse lost share in cereals, cookies and other categories.

In 2020, TreeHouse's overall comparable sales rose 2.7%, behind other grocery players like Kraft Heinz, where revenue by that measure increased 6.5%, and Albertsons, up about 12%.

Pandemic-driven challenges added to problems TreeHouse already faced from acquisitions that executives said overwhelmed its operations, and pressure from retailers to improve quality and lower costs.

Mr. Oakland said he has already simplified TreeHouse's operations. The company stopped making 11,000 items, got rid of 11 factories and sold off some businesses.

Activist investor Jana Partners, which disclosed a 7.5% stake in TreeHouse earlier this year, said it is encouraged by the steps the company has been taking. The New York-based investment firm is pushing TreeHouse to improve shareholder value, in part by considering a sale of the company, according to a regulatory filing.

TreeHouse said it can boost its valuation by being nimbler. The company is buying new packaging equipment that is easier to modify and developing artificial intelligence to improve order forecasting.

Mr. Oakland plans to cut costs throughout the company to help pay for that, and he said he remains confident that private-label products will find favor again as consumers resume normal shopping and eating out. Stimulus checks, he said, allowed people to temporarily splurge on name brands.

"In times of uncertainty, people went to brands," Mr. Oakland said. When the pandemic ends, "private label will get its share."

Write to Annie Gasparro at annie.gasparro@wsj.com

 

(END) Dow Jones Newswires

April 18, 2021 11:14 ET (15:14 GMT)

Copyright (c) 2021 Dow Jones & Company, Inc.

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