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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Nov 28, 2012 1:04PM

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Nov 28, 2012 12:59PM

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Nov 28, 2012 12:56PM

>>> 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<<<


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Nov 28, 2012 12:53PM

 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

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
 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
 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
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
 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
 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

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

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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Nov 28, 2012 11:50AM
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Nov 28, 2012 11:32AM
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Start with one dem and one repub - no deal over you both go ....then move onto say 200 wall streeters (blankfein among them) 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.....

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Nov 28, 2012 11:23AM
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Nov 28, 2012 10:36AM
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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