A Closer Look At Kraft’s Refrigerated Meals Business

by Trefis Team
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Quick Take

  • A shift in food expenditure growth towards at-home meals has driven growth in the refrigerated meals market.
  • An improving macroeconomic environment is expected to drive better volume-mix in the long run.
  • Higher prices driven by higher commodity costs are expected to further fuel market growth.
  • The increasing inclination towards vegetarian foods is a positive for Kraft’s Boca Foods subsidiary.
  • Perceived negative health impacts of added preservatives and other chemicals are expected to continue dragging sales from the segment.

We recently launched coverage of the Kraft Foods Group (NASDAQ:KRFT) with a $55 price estimate. According to our estimates, the refrigerated meals division contributes around 15% to the company’s value. The division primarily deals in packaged dinners, lunch combinations and processed meats.

Oscar Mayer refrigerated meat products, Claussen pickles, and Boca soy-based meat alternatives are some of the popular products sold by the company under this division. The segment generated $3.3 billion in revenues during 2012 with adjusted EBITDA close to 15%. We expect Kraft’s revenues in the segment to grow at an average annual rate of 5-6% primarily driven by market growth backed by improving macroeconomic environment and higher prices due to rising commodity costs.

See our coverage launch note: Kraft Foods Group New Coverage: $55 Trefis Price Estimate

Shift Towards At-Home Food Consumption

There has been a shift in consumer preference towards at-home meals in the U.S. since the great recession of 2008 as the growth in dollars spent on food away from home has slowed drastically driven by consumers motivated towards cutting down on their food bills in a tough economic climate. According to the data collected by the Economic Research Service department of the U.S. Department of Agriculture (USDA), the growth in total expenditure on food away from home has slowed down significantly in the last four years to a CAGR of 2.8% from 5.5% CAGR during the 20-year period before that. However, growth in at-home food expenditures slowed marginally to around 3.3% against the 4% CAGR observed during the 20-year period preceding the great recession. [1]

Refrigerated meals provide consumers with the benefit of convenience while maintaining lower food bills simultaneously. Hence, the refrigerated meals market has witnessed growth during the recent years at the expense of foodservice outlets.

Improving Macroeconomic Environment Will Help

It should be noted here, that the neutralization of the above trend is highly probable over the next few years depending upon the rate at which the U.S. economy recovers to pre-recession consumption growth levels. The steadily improvement in macroeconomic data supports the view that we are headed in the right direction. However, higher consumption growth is expected to translate into faster growth in total food expenditure – both at home and away from home – in all categories including refrigerated meals driven primarily by favorable volume-mix as discretionary income levels rise.

Higher Commodity Costs To Push Prices Higher

Kraft’s refrigerated meals division uses commodities including dairy products, meat products, wheat, corn products, soybean and vegetable oils, sugar and other sweeteners as raw materials. According to the data collected by the Bureau of Labor Statistics, the prices of milk have risen at a CAGR of 4% and beef prices have shot up at a CAGR of 6% while the prices of chicken have risen at a CAGR of 5% over the period of last three years.

Drought conditions in the U.S. during 2012 caused a sharp increase in these commodities as higher temperatures lead to lower production of milk and higher operating expenses at farms. Furthermore, lower agricultural production of corn, soybean and other crops used as livestock also lead to higher commodity costs. Extreme weather conditions from droughts to floods can impact food prices. Although there are signs of improvement in some regions, we expect commodity costs to remain high over the next 6 months and grow at a CAGR of 4-6% in the long run.

Vegetarian And Expanded Food Options

Another important emerging trend in the U.S. food and beverage market is that of increasing vegetarian and vegan food adoption. According to Datamonitor, around 5.4% of all new products launched in 2011 were either vegan or vegetarian as compared to less than 4% of new products launched during 2006.

Although the number of full-time vegetarians in the U.S. is still relatively small at around 5% of the total population, the market can grow at a rapid pace in the coming years based on increasing inclination of consumers towards vegetarian and healthier food options. Kraft Foods Group’s refrigerated meals segment includes earnings from the Boca Foods Company, one of its subsidiaries that makes a variety of frozen low-fat, organic and meatless products. The product range is very popular among full-time vegetarians and consumers looking to moderate their meat intake.

Perceived Health Impacts Due To Added Preservatives

On the other hand, one of the biggest drags to the segment’s growth is the perception of low nutrition value in refrigerated and frozen foods due to added preservatives. Preservatives are added to these foods in order to retard their spoilage by micro-organisms and help retain color, texture and flavor for longer periods. According to the latest research from ConAgra, a significant majority of consumers see frozen foods in negative light. In the meanwhile, changing this perception among consumers by increased focus on marketing and packaging has become a priority for the industry. [2]

In response to this growing trend, Kraft’s Oscar Mayer announced new hot dogs called ‘Selects’ that had no artificial preservatives, flavors or colors in 2010. The company further built upon the success of its Select hot dogs to offer a complete line of meat products including bacon and cold cuts in 2012. [3] The company is also working on reducing the sodium content in these products significantly in order to address persisting consumer concerns about these products.

Overall, we forecast the market for refrigerated meals in the U.S. and Canada, to grow at around 4% CAGR over the forecast period primarily driven by growth in pricing and at-home food expenditure while volume growth is expected to largely depend upon effectiveness of innovation in reducing the content of chemicals perceived as harmful in these food options and the success of marketing efforts in enhancing consumer perceptions.

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Notes:
  1. Food Expenditures Overview, www.ers.usda.gov []
  2. ConAgra on a mission to change consumer perceptions of ’highly processed’ frozen meals, www.foodnavigator-usa.com []
  3. Oscar Mayer First To Offer Complete Line of Meats That Have No Artificial Preservatives, Flavors Or Colors, www.kraftfoodsgroup.com []
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