Big U.S. meat companies did well in 2012, but now many are dealing with the fallout from the record drought in the Midwest last summer. The absence of rain badly hurt agricultural crop production, driving up the prices of animal feed and, especially, grains.
Hormel Foods Corp., producer of the iconic (but much maligned) Spam as well as 34 other brands that are also No. 1 or 2 in their categories including Hormel chili, Jennie-O Turkey and Wholly Guacamole is a case in point. The big Austin, Minnesotabased company is finding it challenging to pass along higher costs to consumers suffering from lackluster wage growth or unemployment.
But Hormel has expanded beyond meat, offering everything from Mexican packaged foods to microwave meals, and four out of five of its business segments increased sales and profits in the fourth quarter. The food maker reported net earnings of $132.6 million, up 13 percent from $117.3 million a year earlier, though sales increased by only 3.2 percent, to $2.17 billion from $2.1 billion for the year-earlier period. For the year ended October 28, the company had net earnings of $500.1 million, up 5 percent from $474.2 million the previous year, on sales of $8.2 billion, a 4 percent increase from $7.9 billion the year earlier.
Though Hormel expects to grow sales and earnings again in 2013, its management has warned investors that higher grain costs and volatile protein prices will take a toll. To buffer itself, the company has been diversifying its product portfolio ever more widely. In its latest example, Hormel early last month said it would acquire Unilevers Skippy peanut butter business for $700 million, a move that puts Hormel more deeply into packaged foods. Such moves come naturally to CEO Jeffrey Ettinger. A lawyer, he joined Hormels legal department in 1989. Six years later, seeking business experience, he took the opportunity to become a product manager in the Hormel chili marketing department six years later, though it was several notches below his previous position in the company hierarchy and required a salary freeze.
Ettinger, 54, didnt always make his home in the Midwest. He grew up in Pasadena, California, and went on to the University of California, Los Angeles, earning an undergraduate degree in political science, then a law degree. Ettinger did well marketing the chili product, enough to move up to assistant treasurer, treasurer and then president of what is now the Jennie-O Turkey Store. In 2001, while Ettinger was running Jennie-O, Hormel made what is still its largest acquisition, of Turkey Store Co., and combined the brands and two companies to create one product line. Ettinger ended up merging the better-known logo ¬of the Turkey Store a green awning with the more famous Jennie-O name. The acquisition and integration efforts gave Ettinger a deep understanding of how supply chains can improve profitability, as the turkey division ran everything from hatcheries to feed mills to turkey barns and packaged products. He was named president of Hormel Foods in 2004 and the following year became CEO. Julie Segal, a senior writer and longtime vegetarian, recently met with Ettinger in New York to talk about the challenges of the food business and Americans changing tastes.
Institutional Investor: American eaters are increasingly trendy eaters. How do you know what areas to expand to?
Ettinger: To me, its really very incremental. The kinds of things that the team is working on today are built on platforms we started much earlier, but now were fleshing them out or were going somewhere broader with them. Weve expanded the value-added turkey business. Jennie-O Turkey Store is really a huge piece of our business now.
Weve placed a lot of emphasis on Mexican food, but we started that in the 80s and expanded it in the 90s and then made a major step in creating MegaMex in 2009. Thats a joint venture between Hormel and a company in Mexico called Herdez Del Fuerte. That joint venture, in turn, has made two more acquisitions recently: the Wholly Guacamole brand we bought in 2011 and Don Miguel, which makes flautas and empanadas, the year before.
Youve stressed having a balanced portfolio of products, which makes sense but can be tricky to implement. Give me some examples and the decision making behind them.
A lot of Don Miguel products are sold in convenience stores. So that was one of the appeals of that line to us, as we want to do more in the immediate-consumption channel. A lot of Hormel items are more-¬traditional meal-based items. But we know the modern consumer isnt always just sitting down to a traditional meal.
Another example is our Mexican strategy and its breadth. We had partners from Mexico since the 90s, and we started bringing authentic Mexican items to the U.S. mole, nopalitos and Herdez salsa. Ultimately, though, whats even more valuable is the combination of these made-in-Mexico items with more-Americanized items like the Chi-Chis and La Victoria brands. Three years ago we bought Country Crock from Unilever for its side dishes. It fit into the same sales section as our refrigerated entrées, but it was also a nonmeat line. That further spreads our bets.
Every company seems to want to expand its non-U.S. sales footprint. But Hormel only has about 4 percent of total sales coming from international sources. Whats your approach to international?
Compared with our peer group, were at the bottom. Wed like to change that. Wed like to do it incrementally. The international team has been growing at a faster rate than our overall company. Our emphasis is in China and other Asian markets. Our leading brand outside the U.S. is Spam. It does quite well in Korea, Japan, the Philippines, and were introducing it to China right now.
Spam? In China?
Yes. It got off to a challenged start for political reasons in that we introduced it and then, in a complex back-and-forth between countries, it was banned at one point. Not Spam itself, but they refused to receive pork-based imports of value-added items for a stretch of time. Now its back on again. Its still pretty early in the game, though. Consumers who sample it like the taste, so then its really a matter of getting them used to seeing it in the grocery stores and buying it.
What is your strategy in China?
Just to backtrack, Spam was the only item that those policies really affected because all of the other items that are manufactured for the Chinese market we actually make in China. We have a plant in Beijing. We have a plant in Shanghai. The strategy has been to build the brand locally. Similarly, we dont reimport. Were not making things in China and sending them back to the U.S. Its all for that market.
What other avenues are you pursuing to expand internationally?
Weve done a nice job of gradually building the brand from a retail standpoint, but weve done an even better job of becoming a food service supplier to both Chinese-oriented chains and some of the multinationals the Yums and McDonalds and Papa Johns and Subways that are expanding quite rapidly in China right now.
You have a Mexican joint venture. What about Latin American expansion?
Our first emphasis is going to be in Asia because we think those businesses arent nearly scaled to where they could be. We have some sales in Mexico in the food service trade; some in grocery with traditional Hormel items and then Jennie-O sales are quite a decent amount. Were always looking for other markets, but right now we havent optimized Asian markets.
Hormel has a unique structure, with only part of the company traded publicly. Tell us about the origins of that and the benefits.
Were 48 percent owned by the Hormel Foundation, which George and Jay Hormel created in the 1940s to preserve control of the company and keep it local in Austin. Were held to the rigors of the public market because the other 52 percent is traded. We do the quarterly calls, and were out talking to our investors on a regular basis. But the 48 percent gives us the ballast of thinking more long-term. You know that youre not going to get taken over. You know that an aggressive outside investor isnt going to come in and say, Gee, I want you to have a much more short-term orientation.
Is it difficult to attract people to a small town in the Midwest?
There was a stretch of time, maybe in the 90s, where it seemed we were losing a disproportionate share of younger people. But I think our stability is particularly appealing now, especially given what has happened with some of these more go-go industries and the dot-com bust. Second, I would point out that the Internet and online connectedness has changed the equation. Does it really matter whether youre in Austin or someplace else these days?
What role does technology play in the food business?
Ive got a couple examples. Were among the pioneers in the use of a technology called high-pressure pasteurization. Our head of R&D got his Ph.D. in this topic. High-pressure pasteurization is great for sliced meat items. Its not invasive to the product, but it kills any potential pathogens and provides you with top quality and excellent shelf life.
We pioneered the technology truly as a food safety intervention, but once we saw what benefits it had, weve been able to expand the use of that to what we call our Bread Ready franchise in our food service business presliced meats for food service. We have the top share in that area.
Our retail group then discovered that by using this you can pull out any preservatives from your sliced meats, and that enabled us to enter a new category with Hormel Natural Choice, an all-natural luncheon meat that is preservative-free. We now compete against Hillshire brands and Oscar Mayers brand within that premium segment of sliced lunch meats.
Obesity and healthier eating has become a hot political topic these days, with Michelle Obama championing strategies to combat weight gain and Mayor Bloomberg preventing supersize sodas from being sold in New York City. What is Hormel doing to address the issue?
We know that some of our more traditional items, Spam luncheon meat or Black Label raw bacon, are never going to be in the sweet spot of somebody looking at food totally from a health and nutrition perspective. We think on an occasional basis they can be part of your diet, though. But we have a number of offerings that we think do fit well with the current trend. The Jennie-O turkey portfolios whole ad campaign is about making the switch to a healthier protein and urges consumers to have turkey burgers, have turkey in your lasagna, that kind of thing. Weve grown at great guns with that. The Natural Choice line is another one that has great appeal to consumers thinking about nutrition, health and wellness. Even the new kid on the block, Wholly Guacamole, is just great in terms of the nutrition profile that people are looking for. Thats growing well in retail and with manufacturers that provide avocado and guacamole to the food service trade. Youre seeing guacamole on sandwiches at chains like Subway. Were a supplier to them. Clearly, consumers would like to have more offerings that give them a chance to better manage their diet.