Local Public Company Feature Part 2: Smucker's TransformationBy: Ryan T. Fulmer
Wednesday, August 31, 2016
Over the last 14 years, The J. M. Smucker Company has transformed their business. We all know them best for their jams and jellies, but they now operate in three segments: coffee, consumer foods, and pet foods. While you, the consumer, may have missed the transformation, shareholders certainly have not as the market capitalization has risen from $2 billion in 2002 to $15 billion in 2016.
Smucker’s has a strong foothold in almost all of the categories in which they compete. Let’s take coffee for example. They own and license brands such as Folgers, Dunkin’ Donuts, and others. Smucker’s estimates they have 55% market share in ‘mainstream’ coffee, 29% in instant coffee, and 15-16% in premium and one-cup coffee.
To some degree, Smucker’s has benefited from a ‘coffee tailwind’ as coffee has become increasingly popular over the last several years, which has led to category growth of 10%. The majority of the growth has come from one-cup servings (i.e. Keurig K-cups).
The use of K-cups has taken off over the last few years. It is estimated that household penetration rates for one-cup coffee have increased from 8 to 35% from 2009-2015.
The coffee segment has been important to Smucker’s growth and profitability and has generated profit margins of almost 29%--or 9 percentage points more than consumer foods (think jams and jellies).
Diversification is important for investment portfolios as well as revenue streams, and Smucker’s revenue is well diversified between coffee (29%), consumer foods (29%), pet foods (29%), and international foodservice (13%).
What’s peanut butter and jelly without Jif?
One of Smucker’s growth strategies is to expand strong brands, such as Jif, into billion-dollar brands. Jif currently has about $625 million in sales (or 27% of consumer foods), and they are looking for growth in convenience packaging, natural and specialty, snacking, and adding flavored Jif alternatives.
Fruit spreads and jellies have about $944 million in sales, and Smucker’s has almost half of the market. Here again, they are working on creating new packages, flavors, and spin-offs to grow the Smucker’s brand. If you have children, you may have heard of “Uncrustables Sandwiches.” Their sales generate about $200 million in revenue, which has been growing double-digit for the last 17 quarters!
If you’ve sold products in grocery stores for over 100 years and have strong relationships with retailers and distributers, getting more square footage in each store is a priority, and through a series of acquisitions, Smucker’s has entered the pet food category.
While it might not seem like a natural category for a producer of jams and jellies, at first glance you might be surprised to learn that Smucker’s sells over $2 billion in pet foods each year. Pet foods and pet snacks make up the third largest grocery store sales category.
If you’re a pet owner, I’m sure you have heard of their brands, such as Milk-Bone, Pup-Peroni, Meow Mix, Kibbles ‘n Bits, or maybe one of their premium food offerings like Nature’s Recipe.
Pet owners are deeply loyal. In fact, 1 in 5 pet owners prefers to spend Valentine’s Day with their PET rather than their partner! And nearly 75% of owners will pay for the best care for their pet regardless of the cost.
For over 35 years, we at Beese Fulmer Private Wealth Management have focused on investing in companies where they are a clear market leader, great managers, and great capital allocators (think growing dividends, share repurchases, and reinvesting in the business).
Since we have spent quite a bit of time updating you on their business segments, let’s dive into one of their capital-allocation focuses--dividends.
From 2007 to 2016, (estimated) dividends per share have risen at an average rate of 10% per year. Growing dividends results in more income for you, the investor. Let’s say you purchased 1,000 shares in 2007 and received $1.12 per share (or $1,120) in dividends throughout the year. In 2016, the same 1,000 shares are paying $2.65 per share and generating $2,650 in income per year.
Growing dividend income is very important for retirees, and Smucker’s is a great example of how dividends can impact your retirement.
Depending on your individual goals and risk tolerance, Smucker’s may be a potential investment for your portfolio.
Source: Company filings
Beese Fulmer Private Wealth Management was founded in 1980 and is one of Stark County’s oldest and largest investment management firms. The company serves high-net-worth individuals, families, and non-profits and has been ranked as one of the largest money managers in Northeast Ohio.
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