Economic headwinds are among the first things that strike our mind when we witness a weak performance by a company nowadays. But there are some companies who perform badly and try to veil their woes under the garb of a tough economic environment. A classic example of this type is Campbell Soup (CPB, Financial). The company posted its results recently and tried to pull of the same window dressing trick. Though the performance was better than the Street’s expectations the shares fell after the news. Let’s see why.
A closer look at the performance
Revenue from its product Prego, a pasta sauce, rose 3% because of Campbell’s addition of new flavors and increased advertising for the same. Even the U.S. Beverages segment performed remarkably well with a revenue increase of 5%. Another companion to this segment was the Global Snacks segment which similarly witnessed a rise of 3% in the revenues. The higher prices of the products were the key drivers here. But here again the smiles did not last long. Though the volumes had increased the earnings from the segment dropped by $9 million to $73 million, the reason again being increased spending on product promotion and higher ingredients costs.
Will there be any respite going forward?
The Camden based soup maker plans to launch new flavors in its soups segment this year. This will be focused on the young crowd who would like to try a variety of soups available in pouches. But we need to wait and see how much it works for the company since it will have to spend on marketing, and at the same time it cannot increase the price since it may become unattractive to the teenagers. A double whammy I should say!
Counting on price hikes
The company is again planning to increase its product prices next month as well as in the next year. The increase will be in the list price which the company charges its retailers for its products. But adding new products and increasing promotions is not always the solution to regain the lost market share. The prices need to be balanced. The market share of Campbell has fallen by 2.3% to 59.6% in the last one year. It lost its share to its some of its competitors like General Mills (GIS) who offer branded products. General Mills provides soups under the brand name of Progresso which have been doing well, giving tough competition to Campbell.
Conclusion
Decreasing market share, declining earnings and gross margins along with wrong timing for continuous increase in prices have all worked together to make the company go the wrong way in this tough economic environment. Moreover, another round of price increases has put a question mark on how the future will play out. In my opinion, Campbell is a company which should be watched from the sidelines at best, until we see some signs of a reversal in its fortunes.
