Katzman's Kitchen
Embracing Change
Eric Katzman, CFA
Research Analyst
(1) 212 250-4968
eric.katzman@db.com
Fundamental, Industry, Thematic, Thought-Leading
Deutsche Bank Company Research's Product Committee has deemed this work
F.I.T.T. for investors seeking differentiated ideas. Here our food team analyzes the
relationship between brands, retailers and consumers within the context of
demand elasticity, private label, brand consolidation and the macro-environment.
Deutsche Bank Securities Inc.
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LOCATED IN APPENDIX 1.
FITT Research
Companies featured
ConAgra Foods (CAG.N),USD14.48 Hold
2008A 2009E 2010E
EPS (USD) 1.07 1.39 1.54
P/E (x) 22.6 10.4 9.4
EV/EBITDA (x) 12.5 6.9 6.6
Del Monte Foods (DLM.N),USD6.75 Hold
2008A 2009E 2010E
EPS (USD) 0.70 0.56 0.64
P/E (x) 14.6 12.1 10.6
EV/EBITDA (x) 8.4 6.9 6.5
The Hershey Company (HSY.N),USD35.66 Hold
2007A 2008E 2009E
EPS (USD) 2.08 1.85 1.91
P/E (x) 23.3 19.3 18.7
EV/EBITDA (x) 12.3 10.9 10.7
Sara Lee (SLE.N),USD9.50 Hold
2008A 2009E 2010E
EPS (USD) 1.18 1.03 1.10
P/E (x) 12.8 9.2 8.7
EV/EBITDA (x) 8.0 6.0 5.5
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Fundamental: Embracing Change
More than at any time in the past several decades, change is likely coming to the
food industry. For many years the specter of U.S. retail shelf consolidation
loomed, but minimal change actually occurred. We see a period over the next few
years where tertiary brands come under enormous pressure as retailers use both
data and private label to scale back on SKUs / brands to optimize shelf profitability.
Industry: Shelf Consolidation
The combination of managing input cost volatility and pricing is already challenging
to food companies. With macroeconomic pressure leading to a greater embrace
of private label by consumers, the industry will remain challenging with likely
greater separation between the haves (leading brands) and have-nots (tertiary
brands) in terms of fundamentals, and stock price performance.
Thematic: Retailers, Pricing, Competition & Elasticity
Given significant pricing the last 18-24 months, we review private label, brands
and elasticity trends for 29 categories. Retailers are pushing for lower prices but
we argue this is an irrational move that will yield minimal if any share gains, limit
food (both manuf. and retail) industry profitability and sap resources for long-term
innovation. If pricing weakens across the industry (all else held equal), valuation
multiples are likely to contract meaningfully as investors question brand power.
Thought Leading: Consolidation Likely
We continue to view the long term non inflation-impacted growth model of 3-4%
sales, 4-5% EBIT and 7-8% annual EPS increases as realistic for the average
company. But some companies will come under greater pressure. With greater
dispersion of results, M&A is more likely within the group assuming credit markets
eventually become more accommodative.

Table of Contents
Investment Thesis ............................................................................. 3
Outlook & Summary..................................................................................................................3
Valuation ..................................................................................................................................4
Risks ........................................................................................................................................4
Private Label ...................................................................................... 5
Cyclical Versus Secular .............................................................................................................5
Relevance To Tertiary Brands....................................................................................................5
Private Label Growth Accelerating............................................................................................6
Conclusions............................................................................................................................10
Elasticity: One Year Later................................................................ 11
Elasticity Study........................................................................................................................11
Company Results: Is It Consistent? ........................................................................................12
Valuation ................................................................................................................................14
Selected Company Specifics ..................................................................................................14
Embracing Change .......................................................................... 16
Retail Shelf Space Consolidation.............................................................................................16
The Nexus Of Technology & Selling Food ..............................................................................16
Examples: Coffee, Frozen Entrees..........................................................................................17
Conclusions............................................................................................................................18
Retailers: Will Logic Prevail? .......................................................... 19
Current Conditions ..................................................................................................................19
Arguing Against Using The Price Lever...................................................................................20
Possible Valuation Impact…Worst Case Scenario ..................................................................21
The Longer Term View: What’s Next? ........................................... 22
Growth Algorithm ...................................................................................................................22
Haves Versus Have-Nots ........................................................................................................22
Mergers & Acquitions .............................................................................................................22
Appendix .......................................................................................... 26
Elasticity and input cost detail.................................................................................................26