How This Consumer Products Company Survives Competition and Changing Consumer Preferences


Source: Hillshire

Faced with private-label competition and changing consumer preferences, food companies are under tremendous pressure to compete and even survive. Hillshire Brands , a manufacturer and marketer of branded meat-centric food products, is unlikely to suffer the same fate as some of its under-performing peers because of more limited private-label competition and its product innovation capabilities.

Limited private-label competition
As consumers become more cost-conscious while brands no longer play the role of quality indicators in many product categories, private-label products have been a serious threat to many consumer food product companies. Hillshire Brands seems to be one of the notable exceptions. In most of its core product categories, such as frozen protein breakfast, smoked/cooked sausages, and hot dogs, private-label market share is under 6%. In fact, Hillshire Brands is ranked first in the U.S. in all of the above-mentioned categories. For frozen protein breakfast, its dominance is even more stunning as it has eight times the market share of the second-biggest competing brand.

The exceptions include private-label breakfast sausages and mainstream lunch-meat, which enjoy market shares of 11% and 17%, respectively.

In breakfast sausages, Hillshire Brands' Jimmy Dean brand has the largest share of U.S. sales with close to three times the market share of its nearest competitor. This allows Hillshire Brands to benefit from economies of scale in purchasing and marketing, relative to private-label competitors.

With respect to mainstream lunch-meat, the company's Hillshire Farm brand is less of a dominant player as it ranks third in the country, with about a third of the market share held by the market leader. However, recent sales trends are positive, with lunch-meat volumes remaining stable in the second quarter of fiscal 2014 after a strong 6% increase in the corresponding quarter of fiscal 2013.

The low private-label penetration rates for Hillshire Brands' meat-centric food products mirror that of another U.S. food product category -- confectionery products. Hershey , best known for its chocolate candy, had a 30.9% share of the U.S. confectionery market as of end-October 2013, while an insignificant 3.2% market share was held by private-label confectionery products. Hershey's consistent financial track record serves as another validation of the weak competitive threat from private-label products. Hershey has increased its revenue in every year for the past decade and it has also remained profitable and free-cash-flow positive over the same period.

Consumer habits are difficult to understand. While there aren't any obvious reasons why certain products are more vulnerable to private-label competition than others, hard numbers are the best evidence of any form of brand equity. Industry statistics show clearly that consumers prefer branded chocolates and hot dogs.

Source: Hillshire

Product innovation
New products are the lifeblood of consumer product companies, and Hillshire Brands is no exception. New products introduced in the past three years accounted for 11% of the company's fiscal 2013 revenue, which represented a significant increase from the average 9% sales contribution from new products prior to 2013.

Among these new additions to Hillshire Brands' portfolio, Jimmy Dean Flatbread Sandwiches (wide range of flavors and under 300 calories) and Ball Park Lean Franks (healthier versions of meat with no artificial colors or flavors) were named in Progressive Grocer's 2013 Editors' Picks, which are based on criteria such as innovation, taste, price and convenience. Looking ahead, Hillshire Brands has set an ambitious target of earning 13%-15% of its top line from new innovations.

More importantly, Hillshire Brands isn't blindly throwing darts when it comes to choosing product segments for new innovation. Its efforts are firmly focused on the branded-meal components and branded-ready-meals product segments where gross margins are above 30% and market sizes are in excess of a billion dollars. Similarities are apparent with another branded consumer products company, Kraft Foods , here.

Back in 2008, Kraft Foods considered 17 of its 19 new product launches to be failures. A year later in 2009, it realized that three of its most successful products in 2009 were those that saw the most advertising spending from Kraft Foods, more than $10 million each to be exact. Based on this insight, the company shifted spending to what it called Tier-1 products. As a result, new products were estimated to have contributed 14% of Kraft Foods' sales in fiscal 2013, which compares to a corresponding ratio of 6.5% in 2009.

New products aren't just about chalking up the numbers. What you sell (product segment focus) and how you sell (amount of marketing spend) are equally important.

Foolish final thoughts
The strength of private-label competition is the best indicator of how consumers view the pulling power of brands within different product categories. Hillshire Brands has passed this test with flying colors, given that it has a large relative market share advantage over competitors (including private-label) in most of the product segments where it competes. Moreover, its new product pipeline is expanding and consumer acceptance has been good.

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