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.
Some 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.
- Also see: Morning market stir
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 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.
More from TheStreet.com
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
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
>>> 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).
My choice? Go over the damned cliff - you wanted a compromise, you got it, NEXT tme be careful what you wish for
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!
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.
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...??
Copyright © 2013 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
The bull run may be grinding to a halt as the trading mood turns darker.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.