Is the Price Light?
Some Will Fare Better as Retail Prices Slip
Large Cap Packaged Food
Terry BivensAC
(1-212) 622-0326
terry.bivens@jpmorgan.com
Ken Goldman
(1-212) 622-0359
kenneth.goldman@jpmorgan.com
Jason English
(1-212) 622-0336
jason.english@jpmorgan.com
J.P. Morgan Securities Inc.
See page 86 for analyst certification and important disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may
have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their
investment decision. Customers of J.P. Morgan in the United States can receive independent, third-party research on the company or companies
covered in this report, at no cost to them, where such research is available. Customers can access this independent research at
www.morganmarkets.com or can call 1-800-477-0406 toll free to request a copy of this research.
The issue of pricing has taken center stage for food investors in 2009. Following
three years of commodity-fueled price increases, many food manufacturers have
already seen falling prices to retailers; others likely will. Using a data-heavy
approach, this report marries analyses of historical pricing trends, current
dynamics and anecdotal information by category to develop an actionable view on
which of our large-cap companies are most and least vulnerable.
• Net food prices are set to decline this year, but the impact will likely be
highly category specific. Price declines in commodity categories such as
cheese and milk have already begun, and traditional grocers – wary of losing
even more market share to Wal-Mart – may push for declines in frequently
purchased items such as baked goods, paper products and snacks. Price declines
in non-commodity categories such as cereal and soup are likely to come in the
form of promotional discounts and be shallow and short-lived, we believe.
• Our bottom-up analysis shows ConAgra and Kraft with the greatest price
risk, though the latter’s lower input inflation may well result in higher
margins. The least vulnerable would appear to be Hershey, Campbell Soup,
Sara Lee and Kellogg, by our numbers. We note, however, that still-problematic
input inflation, while sustaining pricing for Hershey and Sara Lee, may create
further margin pressures at those companies. H.J. Heinz and General Mills
appear to occupy the middle ground.
• The market may overestimate Wal-Mart’s appetite for price cuts. In
grocery, Wal-Mart’s approach is highly category specific and aimed at
maximum profitability. Thus, if volumes in any given category hold up, a price
cut may be unlikely. Risks to this thesis include high private label categories,
where the bid nature of the business will likely take pricing down, and
categories in which branded players try to take market share.
• Drooping valuations, an improved sector view and the data unearthed in
this report all suggest attractive returns this year for our Overweight-rated
Campbell Soup, General Mills, Kellogg and H.J. Heinz, although currency
clouds the near-term outlook for both K and HNZ. We continue to be cautious
on Hershey, ConAgra, Sara Lee and Kraft, though the case can be made for a
margin revival for Kraft this year. An upcoming report will preview likely
presentations at the upcoming Consumer Analyst Group of New York
(CAGNY) in (hopefully) sunny Boca Raton.

Table of Contents
Key Investment Points .............................................................4
Valuation Still Matters, as Does Playing Defense..................7
Pricing May Be Stickier than Feared.......................................9
The Retailer Perspective........................................................11
Responding to an Increasingly Thrifty Consumer .....................................................11
Grocers Fight the Channel Shift.................................................................................12
Balancing the Same-Store Sales Impact ....................................................................13
Destination Prioritization ...........................................................................................14
The Elasticity Effect ..................................................................................................15
The Manufacturer Perspective ..............................................16
The Private Label Threat ...........................................................................................16
Elasticity from the Manufacturers’ Perspective.........................................................19
Company Tear Sheets............................................................20
Campbell Soup (CPB, Overweight, $30.30)..............................................................21
ConAgra (CAG, Neutral, $17.67)..............................................................................24
General Mills (GIS, Overweight, $59.41)..................................................................26
Heinz (HNZ, Overweight, $36.10) ............................................................................29
Hershey (HSY, Underweight, $35.10).......................................................................32
Kellogg (K, Overweight, $44.71) ..............................................................................34
Kraft (KFT, Neutral, $28.85).....................................................................................37
McCormick (MKC, Neutral, $31.30).........................................................................40
Sara Lee (SLE, Neutral, $9.96)..................................................................................42
Category Tear Sheets.............................................................45
Summary Category Risk Matrix ................................................................................46
Bacon (Refrigerated)..................................................................................................47
Baking Mixes.............................................................................................................48
Baked Goods (Frozen) ...............................................................................................49
Bread & Baked Good (Fresh) ....................................................................................50
Catsup ........................................................................................................................51
Cat Food.....................................................................................................................52
Cereal (Ready-to-Eat) ................................................................................................53
Chocolate Candy........................................................................................................54
Cheese........................................................................................................................55
Coffee ........................................................................................................................56
Cookies ......................................................................................................................57
Crackers .....................................................................................................................58
Dinner Entrées (Frozen).............................................................................................59
Dry Dinners................................................................................................................60
Dog & Cat Treats.......................................................................................................61
Dough Products (Refrigerated) ..................................................................................62
Entrées (refrigerated) .................................................................................................63

Fruit (Canned)............................................................................................................64
Frankfurters (Refrigerated) ........................................................................................65
Flour..........................................................................................................................66
Frozen Snacks and Appetizers ...................................................................................67
Juice Drinks ...............................................................................................................68
Margarine & Spreads .................................................................................................69
Mayonnaise................................................................................................................70
Non Chocolate Candy................................................................................................71
Pasta Entrées (Canned) ..............................................................................................72
Pizza (Frozen) ............................................................................................................73
Potatoes (Frozen) .......................................................................................................74
Popcorn......................................................................................................................75
Sliced Lunchmeat ......................................................................................................76
Sausage ......................................................................................................................77
Snack Bars (Grain Based)..........................................................................................78
Spaghetti/Marinara Sauce ..........................................................................................79
Spices & Seasonings..................................................................................................80
Soup (Canned) ...........................................................................................................81
Tomatoes (Canned)....................................................................................................82
Waffle/Pancakes (Frozen)..........................................................................................83
Vegetables (Canned)..................................................................................................84
Yogurt........................................................................................................................85

[此贴子已经被作者于2009-2-4 10:13:32编辑过]