Campbell's must compete against private labels and well-known competitors in the hunt for growth

With products ranging from stuffing-flavored chips to chicken noodle soup with bhut jolokia and chili, the companies are increasing competition on supermarket shelves.

While retailers like Walmart (WMT) and Target (TGT) are moving forward with private labels, Campbell Soup Company (CPB) is relying on innovation, marketing and expanded distribution to sell its famous brands like Goldfish.

“It is important to create the right value that [is] not just based on price,” CEO Mark Clouse told Yahoo Finance at Campbell's investor day last week. “It's about how we can create value in a more differentiated and sustainable way.”

Campbell's expects product innovation to increase annual sales by 3%, including a 4% to 5% increase in the highly competitive snack business. The company forecasts long-term annual sales growth of about 2% to 3%, with snacks driving sales growth of 3% to 4%.

The 155-year-old company is looking to reinvent itself with the recent integration of Sovos Brands and a possible name change. Its stock has significantly lagged the market over the past five years, gaining just 10% while the S&P 500 (^GSPC) has gained 88%.

But its quest for growth will face plenty of competition. This summer, Walmart introduced Bettergoods, a higher-quality private-label line with a $5 price tag on most of its 300 items.

Target has 45 private labels that revitalize the company's chic “Tar-Jay” aesthetic, and Costco (COST) continues to thrive with its Kirkland products.

As major retailers have placed more emphasis on private labels over the past decade, the perception of private labels has shifted from “cheaper and lower quality products” to being perceived as “a superior brand to the national brand,” CFRA analyst Arun Sundaram told Yahoo Finance by phone.

Sally Lyons Wyatt of Circana said the pandemic had exacerbated the trend as every retailer and consumer goods company scrambled to get products on shelves. Even those working from home were looking for more variety. As food inflation soared, more shoppers turned to private label.

This trend has continued since then. Year-to-date, unit volumes for private label salty snacks have increased 5.6% year-over-year, while national brand unit volumes have declined 0.8%, according to Circana. Private label has gained market share in general groceries, shelf-stable beverages, refrigerated and frozen foods in 2023.

Wyatt said the “ability to find coexistence [with private-label brands] is key” for CPG companies in the current environment.

The story continues

“There are some categories that [consumers] “I probably always tend to look for more quality … as opposed to others where I might be willing to give up because of the price,” she said.

Campbell's has embraced the spicy seasoning trend, including spicy, chunky microwave soups, to maintain its lead in broths and soups, but former CEO Denise Morrison had underinvested in the segment, Morningstar analyst Erin Lash told Yahoo Finance.

The company needs to refresh its marketing and incorporate consumer insights into the product development process to better respond to changing tastes, Lash suggested.

Even historic rivals such as PepsiCo (PEP), Mondelez (MDLZ), Hershey (HSY) and Kraft Heinz (KHC) are resisting as Campbell's expands its product offerings to include sauces and snacks.

“You're seeing some of the larger players we compete with launching new brands. You're seeing smaller companies coming in and you're seeing private labels becoming a larger part of the portfolio in certain snack segments,” Chris Foley, president of Campbell's snack division, told Yahoo Finance.

More recently, the company has had success with premium-segment products with the integration of Rao's tomato sauce. “What we've learned about Rao's is that a lot of the growth isn't necessarily coming exclusively from high-income households,” Clouse told Yahoo Finance.

“National brands need to figure out the optimal price difference between their products and those of other brands,” Bryan Spillane, an analyst at Bank of America, told Yahoo Finance.

Campbell's brands, such as Cape Cod and Kettle Chips, are priced between its own brands and those of other national brands, which is an advantage, says Spillane. But the company faces competition from PepsiCo's Frito, which relies on promotions.

Spillane said increasing the national presence of certain Campbell's snack brands is key to growing scale. Clouse said the company is consolidating and reorganizing distribution channels, including buying back and merging Snyder's-Lance and Pepperidge Farm routes in certain markets.

The team claims it has already seen improvements in inventory levels and service levels. “We are continuing to simplify our network … by consolidating our hub and depot network into fewer locations,” Clouse said.

But whether Campbell's can win with innovation remains to be seen.

Sundaram said PepsiCo, Mondelez and Hershey have “set themselves apart” in the consumer goods sector and he would not “put Campbell's or even Kellanova (K) in the same context.”

The three players seem to have understood the trifecta of strong innovation, marketing and product distribution. For example, Mondelez's Oreos can be found on every shelf, from movie theaters to gas stations to dollar stores, Sundaram said.

Consumer goods companies that have “been able to demonstrate they can return to growth” have been rewarded by investors, Consumer Edge analyst Connor Rattigan told Yahoo Finance. Companies that have not been able to do so, however, are under pressure as consumers become more selective with their money.

Much of Wall Street is still waiting to see whether Campbell's initiatives will pay off. The company currently has five buy ratings, eleven hold ratings and four sell ratings.

Spillane maintained his Underperform rating with a price target of $46. The rating “reflects concerns about fiscal 2025 organic sales growth given the current challenging conditions in U.S. packaged foods,” it said in its note to clients.

Lash rated the company at “medium uncertainty” due to “intense competitive pressures from national rivals, private labels and other niche offerings in the natural and organic products space,” she wrote in a client note, but estimated the stock's “fair value” at $61.

JPMorgan analyst Ken Goldman is more optimistic, rating the company “overweight.” In a recent note to clients, he wrote: “We believe the combination of Sovos' strong growth and organic margin improvement should give investors a reasonable amount of confidence that CPB can grow its earnings as planned over the next few years (despite macroeconomic challenges).”

—

Brooke DiPalma is a senior reporter at Yahoo Finance. Follow her on Twitter at @Subscribe or email her at [email protected].

Click here to get all the latest retail stock news and events to optimize your investment strategy