Hormel Foods no longer is sugar-coating extent of its Muscle Milk problem: it’s “all hands on deck,” ceo Jim Snee told investors yesterday as trouble in protein bev category leader marred record 2d quarter for marketer of meat products and grocery items. In past, HRL has laid blame on aggressive pricing in c-stores by unnamed key rival (known to be Core Power, moving thru Coke system) and 3d-party recall by copacker HP Hood back in 2016. Yesterday, tho, Snee itemized flock of issues former CytoSport-owned brand is confronting. “We are working on a lot of fronts in terms of distribution, messaging, pricing, branding,” he said. “It’s all hands on deck.”
The continued distress on brand that served to diversify meat producer into drinkable-protein space came in otherwise solid period, with HRL reporting 7% increase in net sales to $2.3 bil on flat organic sales growth, with earnings per share ticking up 13% to record 44 cents and co affirming its guidance for balance of year. But its grocery segment suffered decline in profit blamed on increased promo activity and lower volumes at CytoSport, as well as some stresses to contract mfg biz.
“Low-single-digit sales growth in our core Grocery Products portfolio, led by Wholly Guacamole dips, the Spam family of products, Herdez salsas, Dinty Moore stew and Hormel chili, was more than offset by significant sales declines across the CytoSport portfolio and our contract manufacturing business,” co reported. It doesn't break out specific CytoSport sales, comprised mainly of Muscle Milk products. Grocery Products sales were off 1.4% to $631.6 mil. Operating profit sagged 11.7% to $95.65 mil.
“There is one very aggressive competitor in the marketplace,” ceo Snee said in apparent reference to Core Power, explaining volume decline and upped promo spending. Among “numerous headwinds” that Snee said Muscle Milk is facing are struggles at c-stores, where brand had to recover from 2016 recall and apparently continues to get bludgeoned by Core Power’s low pricing, and in specialty channels like gyms and nutrition stores, where sales are migrating online. “Our brand teams are working on consumer messaging, and making sure that we have the right pricing,” Snee asserted. “The specialty channel is something that is less competitive and probably more structural as sales in that channel continue to migrate online. We’re working to move more of our sales online through our digital experience effort that we have going on.” Snee argued that co’s recent move to merge specialty foods unit anchored by CytoSport into grocery div should give those brands more clout. “The move into the grocery products segments will provide more branding and marketing resources and I expect that shift will return CytoSport to growth,” he said. As for the distribution issues, Snee wasn’t specific about what those are, tho he did take pains to cite support for PepsiCo DSD alliance. “We've got a great distribution partner with Pepsi, but we haven't solved it yet.”
Still, sources contacted by BBI who play in protein space cited broader range of issues than that. One with rival protein line noted that Muscle Milk increasingly is squeezed by broader range of options, some of which didn’t exist a few years ago, including all-natural, plant-based protein drinks, dairy-based drinks (including Core Power) and protein waters. They’re all taking a toll, he said, as consumers migrate away from “heavy-shake, heavy-calorie kinds of products.” As a co with little experience playing in fast-shifting protein-bev and fitness spaces, Hormel team isn’t in best position to adapt, he figures. As for recent shift of CytoSport/Muscle Milk into grocery unit, that will put it in hands of sales force unaccustomed to calling on bev buyers. So it’s not a clear step forward.
Another exec with familiarity with segment also criticized Hormel for progressively stripping out field marketing, from distinctive branded Jeeps plying key markets to personal appearances by professional athletes. By now, seasoned team that developed DSD plans as indie co has departed, leaving skills void on that front too. He also didn’t minimize notion that Pepsi’s own Gatorade brand, trying to build presence in protein, may be sapping focus from Muscle Milk brand that Pepsi distributes but doesn’t own.
Analyst on yesterday’s investor call asked bluntly whether divestment might be an option if turnaround effort doesn’t pan out in medium term. “I would say, at this point, CytoSport is still a very positive business, very on trend and a great addition to our portfolio,” Snee replied. (BBI got assist from SeekingAlpha transcript in assembling this story.)