Jul 31, 2009

Private Brand Supplier Comes Out

Along with investors, I’ve been watching Ralcorp Holdings closely since it bought Post Cereals from Kraft Foods in late 2007. Post was half as big as Ralcorp ($1 billion in sales versus $2 billion), making it a big gulp to swallow.

Sheer size is one challenge to integrating Post. The other, bigger challenge is in meshing the marketing and distribution.

Up to the acquisition, Ralcorp was a pure-play supplier of private label foods for Wal-Mart and other giant grocers’ house brands. Buying Post Foods changed that. Side by side with Ralcorp’s traditional behind-the scenes processing business, invisible to consumers, Post would be operating in full view with its own name prominently on the box.

Could Ralcorp manage both the PL and name-brand channel relationships at once? Could the executive team align the manufacturing and transactional sales culture which dominated Ralcorp with the marketing mindset inherited from Kraft ?

So far the evidence is encouraging, and more. Ralcorp’s stock has been rising at a time when most of its peers have been losing value. More important, the company’s most recent quarterly report credits Post with making an outsized contribution: $279 million out of $305 million of Ralcorp’s quarter-to-quarter incremental revenue growth.

During a severe recession when private labels have been transcendent, this kind of growth by a branded foods player is extraordinary. It’s clear Ralcorp made a good buy. And they’re obviously not botching it. What’ harder to know from the outside is whether they could be driving their powerful two-horse chariot even harder. Even with Post, Ralcorp is still a distant third in the cereals category to Kellogg’s and General Mills. And at the negotiating table it’s dwarfed by the big retailers. Given those externalities, you have to wonder if there aren’t still opportunities to structure distribution relationships for even faster growth and even higher profitability.

I’d bet there are. When I’ve worked with companies in similar situations, in-depth conversations with branded product managers and retail customers virtually always kick up an attractive mix of short- and long-term possibilities. We then design new programs to go after them. Some are modest, fast, and easy to realize. Others are larger but harder to structure. Either way, my hunch is there’s still plenty of upside left for Ralcorp to optimize its “PL + branded” channel system.

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