ConAgra-Ralcorp deal speaks volumes

The brand-name food company buys the private label maker because it must -- the trend is too powerful not to.

By Jim Cramer Nov 28, 2012 10:10AM

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Katrina Wittkamp Lifesize Getty ImagesSome decisions, some transactions say more about the U.S. economy than all of the Labor Department, Commerce Department and Agriculture Department combined. The decision by ConAgra (CAG) to buy Ralcorp (RAH) for $5 billion is one of those decisions.

 

ConAgra is a pretty good food company with lots of different household brands cobbled together over time that take advantage of an excellent supply chain and good relations with both supermarkets and restaurants -- read: McDonald's (MCD) -- alike. Its brands are known to you: Healthy Choice, Orville Redenbacher, Slim Jim, Hebrew National, Marie Callendar, Hunts, Wesson, Swiss Miss, Pam, Chef Boyardee. They are brands that were in your mom's cabinets, and they will be brands that are going to be in your kids' cabinets.

 

But something happened to brands in the Great Recession. Many of them have lost their cachet -- in part because the makers of the brands have taken price up year after year after year to please stockholders and in part because the big supermarket chains haven't been able to make as much selling them as they once did.

 

The combination of the endless jacking up of selling prices, and the smaller profit margins for the stores that sell them has led to a situation in which the consumer feels pinched and the supermarket feels priced out.

 

Enter private label.

 

At one point, private label came in black and white cans. The supermarkets tried to adopt the equivalent of the pipe and rack outlet store for a Filene's or a Loehmann's or maybe a Marshall's. The idea was to say, "Look at me, I am cheaper than the other stuff. Buy me."

 

Instead it had another connotation when it came to the register, "Look at me, I am out of work, and I am struggling." Further, when it came home, your family said, "This doesn't taste as good as the brands, but you get what you pay for."

 

Along the way, though, we got an evolution of thinking. First, the shopping club concept emerged, Costco (COST) being the prime example. The company, which announced a $7 special dividend Wednesday, has been at the vanguard of providing a private-label brand that is no longer questioned as being inferior to the branded product. In fact, I am sure that, judging by how few people balked at paying higher club member prices, the Kirkland brand might be considered superior to the big-time branded products. Plus, they are more lucrative to the store itself because the gross margins are gigantic vs. the heavily advertised packaged good product.

Then came a recognition that if the store bought product that just looked more like the heavily promoted product, a la Perrigo, in the drug store, it would become more popular given its reduced price tag.

 

The final evolution? Supermarkets now try to outdo the branded product in packaging not just price. When you get to the checkout counter, you now look smarter than the other guy, and very few believe there is a compromise in terms of quality.

 

Given a world where 47 million of the people in this country are on food stamps, up dramatically from just a few years ago, a world where value-buying is now considered a necessity for many and clever by everyone else, having a private-label brand has become the most important way to grow your company if you are still in the consumer packaged goods business.

 

ConAgra's new hybrid model addresses this new world head on. You have some branded in the categories you are certain can't be knocked off easily. And you have superior quality private label in places as widespread as Wal-Mart (WMT), the dollar stores, Costco and Trader Joe's, because the gulf in this country between rich and poor demands it for survival's stake.

 

So ConAgra buys Ralcorp because it must buy Ralcorp. The trend's too powerful not to. Because the world we live in is more of a Tale of Two Cities than we realize, and both cities are fed up with paying more for the same exact product simply for well-known labels. It's an irreversible pattern and CEO Gary Rodkin, perhaps the most perceptive of the branded execs, knows all too well that you capitalize on it or you eventually fade away.

 

Jim Cramer face

 

Jim Cramer is a co-founder of TheStreet and contributes daily market commentary to the financial news network's sites. Follow his trades for Action Alerts PLUS, which Cramer co-manages as a charitable trust and has no positions in stocks mentioned.   

 

 


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45Comments
Nov 28, 2012 1:04PM
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 Take heart Righties. In less than 24 months Obama becomes a lame duck President! Of course the GOP contenders by then will all be saying they were against Nordquist's pledge before their opponents were against it. The effeminate pudge boy's extortion days are OVER
Nov 28, 2012 12:59PM
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In case you doomsdayers haven't noticed uncertainty is ALWAYS part of the game. A safe bet nets you very little. You can do the bunny slopes all your life or you can risk breaking your leg by upping your game and skills and maybe even go to the Olmpics. Sure won't get there on the bunny slopes The risk is a function of the ski slope. As usual, your choice
Nov 28, 2012 12:56PM
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>>> Inflation- diluting dish soap 20 to 1 with water and selling it for the same price. OR you can buy less than half the original concentrated dish soap for the same price. Your choice with no price increase to you! Amazing how it all works out, huh<<<

 

I've actually noticed a couple of years ago that my brand of TP got narrower (saving paper).  As far as the liquids, there's actually a push for "more concentration" so that they can sell less liquid for the same price.  I think it may have something more to do with the size of the plastic containers.  For some reason, they're pretty expensive (petroleum based).

Nov 28, 2012 12:53PM
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 My choice? Go over the damned cliff - you wanted a compromise, you got it, NEXT tme be careful what you wish for
Nov 28, 2012 12:43PM
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Anybody done a study on what percentage of Wal Mart workers gets food stamps? Or live out of their cars? The Company does not pay for their food via wages, YOU DO!
Nov 28, 2012 12:32PM
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 Inflation- diluting dish soap 20 to 1 with water and selling it for the same price. OR you can buy less than half the original concentrated dish soap for the same price. Your choice with no price increase to you! Amazing how it all works out, huh
Nov 28, 2012 12:26PM
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 Wal Mart Beer. Made with St. Louis tap water and non-organic hops grown by illegals. More filling and less tasty-- but cheap!
Nov 28, 2012 12:20PM
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Tumbleweed....... Just put Obama on it dude....... you won he is the president. Write him or pray to him or something.... However you get your wishes and make it happen. Don't waste time here.
Nov 28, 2012 12:16PM
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 Fair is fair. Wal Mart thinks their Chinese and American workers should make the same wage. And you want Unions to get in the way of fairness?
Nov 28, 2012 12:10PM
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 We don't have a Wal Mart brand--- yet. Wait until they start selling cereal and bacon with their name on it. Huge volume, lowest overhead, lowest prices. Of course The Help only makes $1000 a month part time but that is besides the point if you want a great deal, right? The Help can just get food stamps
Nov 28, 2012 12:08PM
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the biggest changes occuring the past few decades are the reduction in people who actually know how to COOK!  and that is not just cooking from scratch but open a can, put it in a pan, and heat it. 

 

the microwave has been all kids know - those born circa 1980 and on. 

 

now if it's not instant food, those grown kids starve or run to a fast food resturant. 

 

the food industry has and will continue servicing this growing demographic. 

Nov 28, 2012 11:56AM
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No I think ConAgra will be just fine holding and distributing a majority of the "private label" and Store branded names...Plus CAG pays a fairly decent dividend around 3.5-4%, so I'm kind of glad they made the move; Supposedly adding to their bottomline within a quarter or two...?

Wish we would have had RalCorp, instead of CAG....Oh, well.

 

The stigma attached to private label has been pretty much removed; And few people pay attention to what the shopper in front of them buys....Who cares? If a dime cheaper, that's a GOOD thing.

Think a lot of the stuff is run on the same production line anymore...?

They just don't have the advertising or marketing cost to deal with.

And we have had "private label" that actually taste better then "name brands."

Probably the salt or sugar...??

Nov 28, 2012 11:52AM
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Awry's Bakery is threatening to close it's doors if it cannot find a deep pocket partner. Awry's said the same thing when union negotiations came earlier this year. The rank and file took the pay-cuts to keep their employer running. Obviously... management lied about the dire nature of circumstances. That brings to mind the Hostess scenario. In both cases, the Supreme Court should be requesting financial data on the wages, benefits, perks and privileges of the entire Board and management to determine their losses. Commonsense dictates that if you are paid oodles to run a business and it fails, you should be broken or in jail, right? Is it all in Trusts? BUST them. If we cannot establish parity for all Americans, then the Supreme Court needs to pass judgment on the imbalance and be vigorous in the penalties. We need to start seeing rich folks-- broke and cash working to Main Street, RIGHT NOW.
Nov 28, 2012 11:50AM
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Bernanke's check just cleared... the Dow just dumped its loss and switched to the fiat stairwell.
Nov 28, 2012 11:32AM
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Let's take all the politicians, bankers, analysts, pundits to the edge of a cliff and shove them over one by one until they agree to develop a financial system "by the people, for the people".......it could go like this ....

Start with one dem and one repub - no deal over you both go ....then move onto say 200 wall streeters (blankfein among them) .....no deal shove them over......the rinse and repeat till a deal is made or even better there are none left and we can start again.....

cramer should go as well just because it would make the world a better place .....
Nov 28, 2012 11:23AM
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We will stumble along on a downtrend until somewhere around 10,500 or so and then a wait and see for a while.  Perhaps back up to 12,000 but i am NOT positive about the next two years.  Look for competition to become much fiercer at the retail level.  We also will see fewer and fewer new products introduced and the dumbing down of innovative ideas that of course are a by product of the socialistic values we are now incorporating into our culture and economy.  I say this with perfect confidence.  The number of alternatives consumers will have in the future will be much much less. There will be less and less motivation to think about innovative ideas and product development. The large Internationals will continue to devour small business ability to compete and manage.  Employment  will be stifled.  Pressures to reduce wages to the $3.50 an hour goal will accelerate and the minimum wage laws will be either changed or ignored.  Chaos is the strength of a Socialistic regime so this "cliff" mentality we are being forced to consider will be just one of many gimmicks to keep any change or improvements at bay while the D.C. crowd  improves its grasp and control over the power being denied the citizens. This may sound scary and negative to folks with little experience other than the last 15 years of a goosed Economy.  But  debt spending has created a false image of reality and the true struggles people have experienced over the years will once again be the norm throughout America and the world.
Nov 28, 2012 10:36AM
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47 million people are on food stamps, NOT 47% of our population.  And when Cramer starts listing all the ConAgra brands and definitively states that they will all be in our kids' kitchen cabinets, we should all be very nervous.  This is the same guy who said that Lehman was a strong company that would be around for decades, less than a week before they went belly up.
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