San Francisco's Del Monte Foods Co. plans to rely on new products, advertising and cost-cutting to spruce up the pantry of slow-growing brands, such as StarKist tuna, it recently picked up from H.J. Heinz Co. The $2.3 billion Heinz deal transforms Del Monte, a 110-year-old company known for canned fruits and vegetables, into a consumer products company with offerings found throughout the grocery store. That's increasingly important strategically as the U.S largest grocers consolidate and try to boost efficiency by purchasing from fewer suppliers. Del Monte appears to be moving quickly to goose growth. The company plans to expand a line of StarKist tuna in plastic pouches that improves taste and portability. The tuna, not packed in oil or water, also carries a higher profit margin than the commodity-like canned tuna products.
But Wall Street so far hasn't been enthusiastic, pushing down Del Monte's stock 30 percent since the deal to acquire nine key brands, besides StarKist, was initially announced last June. Del Monte shares closed Jan. 8 at $8. "These brands have been described as slow growing and there's skepticism on Wall Street about their underlying strength," said Del Monte Chairman and CEO Richard Wolford. "The Street is taking a show-me attitude, which I'm pleased to do." There's certainly no shortage of dubious investors.
"The deal doubles the company's revenue base, while potentially increasing net earnings threefold," Ferguson said. "More importantly, the addition of four No. 1 brands expands Del Monte's scope and strengthens its center-store presence." But achieving Del Monte's growth expectations won't come cheap.
Ad spending will more than double, from $25 million a year to $55 million, the company said. Kibbles 'n Bits and 9Lives will get a significant increase in marketing support to capture a larger share of the growing pet food market. It is unknown which budget will be available for StarKist tuna. Del Monte executives told analysts last summer that advertising support for the range of brands, such as StarKist has been inadequate. That assessment is frequently heard about well-known brands that are no longer a strategic fit for a large global company, such as StarKist was for Heinz.
At Del Monte, Wolford is busy laying the groundwork for the larger company by spending a lot of his time in Pittsburgh getting to know the company's new employees. Del Monte plans to maintain its San Francisco headquarters while keeping many operations in Pittsburgh.
Texas Pacific Group acquired a majority stake in the company in 1997 and brought Wolford on board. The company went public in 1999 for $15 per share — a price the company's stock has not hit since that year. Texas Pacific remains an investor in the company.
Del Monte appears to be moving quickly to goose growth. The company plans to expand a line of StarKist tuna in plastic pouches that improves taste and portability. The tuna, not packed in oil or water, also carries a higher profit margin than the commodity-like canned variety.
To help pay for some of the increased marketing expenses, Del Monte hopes to eventually save at least $50 million through more efficient manufacturing at the newly acquired factories.
But Wolford believes Del Monte's success in selling bonds to help finance the Heinz transaction is a good sign. "In the high-yield bond market, people see the growth potential," Wolford said. "With these brands, we have solid building blocks."