December 6, 2010
By Maureen Azzato
An exclusive to Store Brands Decisions
Through serial acquisition, TreeHouse Foods has grown to a $1.8 billion in five years. In 2005, five former Keebler executives founded the company with the original intent of acquiring consumer packaged goods companies. Since those early days, TreeHouse has instead acquired four private label companies –– Bay Valley Foods, E.D. Foods, Sturm Foods and S.T. Specialty Foods –– creating a product portfolio spanning 15 categories of assorted dry groceries and pourable/wet products.
Today the company employs more than 4,000 and operates 18 manufacturing facilities across North America. Driving the charge is Sam Reed, CEO and chairman, who admitted that early in the company’s development national brands were the original acquisition targets, not private label. “Branded” opportunities, however, were not yielding the returns TreeHouse was seeking. “When we turned to private label, much to our surprise, we saw that there was a consistent history of data going back to 1988 that showed the rate of growth in private label foods over a whole array of product categories and sectors was twice that of the growth of branded foods in the same retail outlets,” Reed explained. “And we do believe that that doubling of the growth rate will continue for the foreseeable future.”
Several factors are driving consolidation in private label manufacturing, namely that the market is extremely fragmented –– 80 percent of companies are small independents, which was more suitable when the grocery industry was primarily regional. But as retailers consolidated creating super regional, national and international chains, few private label suppliers are able to cover an entire retail network at a high level, Reed said. That combination of rapid private label revenue growth and the supplier consolidation opportunity led TreeHouse down the private label path.
During an exclusive interview with Store Brands Decisions, Reed shared his perspective on the trends and dynamics in the store brand market, and the opportunities his company has seized and continues to pursue.
SBD: In 2005, you were very hot on the private label market. Are you as bullish today?
Reed: I’m far more bullish today and it basically comes from a better understanding of the market for private label products, which are as nuanced and segmented and provide as much room for differentiation as the national brands universe. I did not realize that in 2005 when we got started.
SBD: Give us an example of what you mean by differentiation?
Reed: We anticipate that there would be good/better/best offerings among the most progressive retailers.... but it would be a rarity for a retailer to have a premium product offering. What we’ve found is there is a greater presence of that premium offering across different categories and among many more retailers, far more than what I had anticipated. That is now part of our acquisition strategy –– to buy businesses that offer something other than only the national brand equivalent or only the lowest costs products.
SBD: What is driving growth and demand for premium private label?
Reed: Traditional supermarkets were having great difficulty competing with the world’s leading mass merchandiser and super center retailer on a cost and logistics basis, so they decided to develop another strategy to not only generate the revenue that comes from high volumes of private label products, but, more importantly, to kindle and win over consumer loyalty to the brand that is the store.
SBD: Directionally, where are these progressive retailers taking the market?
Reed: The primary demand of our customers is for better products that not only equal but exceed the national brand equivalent, and they want them faster and cheaper. Secondly, our customers have always been focused on costs and logistics, and they now have added to that a critical interest in food safety. We have plant inspections and audits by our customers and our customers now employ food scientists that are comparable and equal to those of national brand manufacturers. At TreeHouse we regard that as a competitive advantage. As the demands for food safety and investments required to meet new food safety standards go up, we believe we are in a better place to deal with those than many others. And lastly, retailers are relying on us more as category captains where for a long time we were asked simply to provide a second opinion to validate the national brand’s view. Now retail customers want to know our views independent of the branded situation. We do our own consumer research, our own tasting panels and that research is now something the retail customer wants to see.
SBD: How much packaging innovation and sustainability discussions are you having with retailers? Is this a major focus of innovation –- more than jut the product itself?
Reed: In five years time it’s gone from zero to one of their top 10 concerns. Fortunately for us, a lot of sustainability initiatives overlap with cost reduction initiatives and a real staple within private label marketing is that our customers expect us to identify productivity improvements in manufacturing, distribution, packaging design or procurement. And then we develop those ideas and many of them are directed at sustainability because you’re cutting down waste in one form or another. A lot of the big projects we’ve taken on [pertain] to packaging design. Second to that is distribution and logistics savings.
SBD: How important are issues such as ingredients sourcing and traceability of ingredients to retailers?
Reed: They are, principally traceability and concerns about products and ingredients in packaging, primarily ingredients that are imported from the growing Third World. Our primary focus in that regard is product safety. Our purchasing team in the last several months has been both to Western Europe and the Far East on procurement missions, and in every instance we send a food scientist along to assess the quality control and the food safety measures.
SBD: What do think of retailers such as Kroger interested in acquiring private label manufacturing capabilities? Will we be seeing more retailers doing this?
Reed: It’s going to be very limited and there are certain food retailers who are committed to their own supply chains and their own manufacturing sites on a broad-scale basis and Kroger is one of those companies. That is a strategy that only a few now employ and I would think that will generally be the case for the foreseeable future. It’s neither right nor wrong, it’s simply a different strategy.
SBD: How many acquisitions can TreeHouse handle in a year and properly integrate them?
Reed: We are a serial acquirer. The timing of individual events is really driven by market conditions and the opportunities presented, and it also relates to the capital markets as well. With regard to our capacity, the real issue is it takes a certain period of time to integrate businesses, which are as much related to human/social/cultural matters as they are to financial or operational ones. We can handle several acquisitions simultaneously provided they are not in the same stages.
SBD: What keeps Sam Reed up nights?
Reed: We have an agenda of rapid growth with the intentions to only do good. What I worry about and what keeps me up is that we should do no harm, and that’s primarily related to product quality and food safety. Secondly, we have an obligation to offer terms of employment where the environment is safe for the employees and that the compensation offered is a fair wage and enables individuals to provide for their families.