ConAgra Foods — as the industry knows it — is over.
The company announced Wednesday it intended to split into two independent companies — Conagra Brands, primarily featuring its consumer brands ($7.2 billion in fiscal 2015 revenue), and Lamb Weston, an off-shoot of its frozen potato portfolio ($2.9 billion).
"I think we're seeing the lining up of a battle of really giant consumer product brands," Kelly O'Keefe, a branding expert and professor at Virginia Commonwealth University, told Food Dive. … [ConAgra] probably [feels] threatened by some of the consolidations of other big players and they’re trying to remain relevant in a battleground for consumer brands in the grocery store. So I think we're going to see that competition intensify."
And ConAgra Foods is gearing up to fight for consumers' purchases with the split.
"Ultimately, our decision to separate these businesses is about unlocking value," Sean Connolly, ConAgra Foods' CEO, pictured above, said on an investor call Wednesday. "We believe that by separating Lamb Weston from our retail business we can better highlight the strong standalone potential of each. This separation best positions Conagra Brands and Lamb Weston to compete, grow, and win, while maximizing long-term value for shareholders."
Connolly, who joined the company in April, will keep his CEO position following the split, anticipated for next fall. Lamb Weston management information has yet to be released. The company's stock leaped 4% on the news.
Here's a look at the intended brands in each category:
Spicetec Flavors & Seasonings
Other vegetable products
Still, Conagra Brands will include some foodservice brands in addition to smaller businesses. An analyst on the investor call asked about the rationale for keeping them.
"These are good businesses," Connolly said. "They are low maintenance. We intend to run them in a way that creates value for shareholders, so that's our base plan. And, as is always the case and I've said to our investors a number of times, we will always remain open to any alternate pathways that emerge that are tangible that can create more value for our shareholders."
Chris Klinefelter, vice president of investor relations at the company, clarified another question about these brands' low profitability. "I think the easiest way to explain that is what's been within part of the commercial segment has been businesses of a very different mix," Klinefelter said. "So I just would not have the same expectation for profit contribution from each one of them."
ConAgra grasping for industry foothold
This shift is one of just many changes for the major processed food brand this year, as it's had to contend with the same concerns as the rest of the industry, chiefly that consumers are not buying enough products deemed "unhealthy." The top 25 U.S. food and beverage companies dropped $18 billion in market share over the last five years, reports Fortune.
"This issue is not going away," O’Keefe said. "Consumers want better food. They want healthier food, they want tastier food, they want sustainably grown food, and they're willing to pay more to get it."
ConAgra's attempts to combat industry struggles haven't paid off just yet. In its most recent quarter, the company reported a net loss of $1.24 billion, down steeply from the previous year's profit of $482.3 million. This was due to its reclassification of its private brands sector as discontinued operations, as it sought a divestment. It found a buyer in TreeHouse Foods earlier this month following investor pressure to cut costs and lose the private brands business.
The company has also seen several executive changes under Connolly's leadership in a short period of time.
"On one hand, I applaud him for understanding the need to change quickly," said O'Keefe. "Because they did need to change. So I don't think they're changing too fast."
This echoes Connolly's investor call opening statement.
"From the outset we have been clear that tremendous change was needed at ConAgra Foods and that with discipline, speed, and a willingness to take bold actions on a number of fronts there was meaningful value to be created," Connolly said.
In addition to "meaningful value," it's important for brands to stand out to consumers as the industry faces immense competition.
O'Keefe said he expects ConAgra to acquire brands despite its potato divestment in an attempt to build up its consumer products portfolio, a trend matched by industry competitors.
He later added, "I think we're seeing the lining up of a battle of really giant consumer product brands … [ConAgra] probably [feels] threatened by some of the consolidations of other big players and they’re trying to remain relevant in a battleground for consumer brands in the grocery store. So I think we’re going to see that competition intensify."
Taking on trends
The company’s divestment of its private-label business was consistent with industry goals to trim underperforming brands. Now that it's splitting — some analysts speculate Lamb Weston might be sold. Another important question looms: what about keeping on trend with consumers who want healthier products?
Company after company has pledged to remove artificial colors and flavors from foods, even risking changes in iconic brands like Kraft macaroni and cheese and Trix cereal. With large brands like this committing, the pressure is reaching new heights.
O'Keefe said that it's more than just announcing a change, but following through and doing it.
"I think there are some very good players in the industry who genuinely understand their need to move in that direction and are working toward it and I think there are others who are playing make believe a little too much," O’Keefe said.
O’Keefe said he would be "shocked" if they didn’t make a similar pledge — and "foolish."
The split is aimed at making sure each company is getting the attention it needs.
"As we do have shared resources currently, we do have management spreading their time and energy out across a number of things, so we believe the pure-play nature of this will contribute meaningfully to the enhanced performance of it," Connolly said.
Connolly anticipates more consistency in its consumer business, in addition to better brand building, innovation, and smart M&A.
Connolly told The Wall Street Journal, while not naming specific potential acquisitions, that Conagra Brands will zero in on "clean label, natural, and organic foods, as well as premium and gourmet. That’s where we’ve got some real opportunities." He also said the company would work to address brands like Hunt’s tomato sauce and Reddi-wip dessert topping more on target with consumer trends.
"Almost all of the big traditional consumer product brands are reassessing their portfolio," O’Keefe said.
What employees should expect
The company has already said it would be cutting 1,500 jobs and moving its headquarters. This shift, though, adds more confusion to which employees will retain jobs.
"I don't think any of the statements from ConAgra have been clear about that," O'Keefe said. "They've talked about financial advantages but they haven't said 'here's our path for the future. Here's the kind of company and this is why we made this change to help us get there faster.' That's really the most important thing."
ConAgra Foods' push to cut costs and increase profitability will be the focus of much industry speculation over the next year, and even more so once the layout of the new separate companies begins to take shape.