The Death of Campbell’s Soup

An American icon is in big trouble Campbell’s Soup (NYSE: CPB) is in turmoil after sales fell by 7% during 2ndst Quarter 2018.

Disturbingly, the sales collapse was the least of Campbell’s problems. CEO Denise Morrison abruptly resigned on 18 May 2018, probably to avoid being fired by the company’s board.

Not surprisingly, Moody’s Investor Service announced that it was downgrading Campbell’s credit rating to Baa2; just two grades above junk-bond status, Bloomberg reported. Campbell’s has short and long-term debts of $9.84 billion that exceeded its TTM revenues of $8.13 billion.

The fear is that Campbell’s will not make enough money to pay off those debts. The fear is legitimate given Campbell’s well-publicized feud with America’s largest grocer Walmart (NYSE: WMT). It also raises the all-important question is Campbell’s making money?

Is Campbell’s Soup Making Money?

The strange thing is that Campbell’s is making money and its revenues are growing. Campbell’s revenues increased during 2nd Quarter 2018, Ycharts data indicates.

Campbell’s reported TTM revenues of $7.858 billion in January 2018, and $8.13 billion on 30 April 2018. The company seems to have made more money off of fewer sales, although Campbell’s is still in a very place.

Campbell’s reported a net income of just $485 million on 30 April 2018. That was less than half the $1.054 billion reported in January 2018 but close to the $488 million reported in April 2017.

Campbell’s was able to generate some cash from its operations; $1.304 billion, but it is not keeping that cash. Campbell’s only had $199 million in the bank in the form of cash and short-term investments on 30 April 2018.

A truly frightening sign at Campbell’s was $5.734 billion in “cash from financing” that means the company borrowed that money. Whether Campbell’s will be able to pay that money back is debatable because the company reported a free cash flow of just $273 million for 2nd Quarter 2018.

Campbell’s liabilities of $13.16 billion are close to the value of its assets which were worth an estimated $14.57 billion on 30 April 2018. Campbell’s had a market capitalization of $10.37 billion and an enterprise value of $17.98 billion on 22 May 2018.

How the American Consumer is killing Campbell’s Soup

The prime suspect in the death of Campbell’s Soup is the American consumer. Changing shopping and dining habits may doom this iconic brand and many prepared foods.

Consumer trends that are slowing killing Campbell’s and similar brands include:

Hot Fresh Soup at the Supermarket

Almost every supermarket in America now sells fresh, prepared hot soups, often at prices just a dollar or so above a can of Campbell’s. Some Kroger-owned King Soopers stores in Denver now employee sous chefs.

A greater menace is Amazon-owned Whole Foods which sells several kinds of hot fresh soup in its stores for a few dollars. That includes fresh chowders and other seafood soups for the price of a McDonald’s meal deal. Soup-making grocers like Safeway, Kroger, Publix and Whole Foods, have become some of Campbell’s biggest and most dangerous competitors.

Eating Lunch Out

Historically one of Campbell’s biggest markets has been workers preparing lunch in the breakdown. Today it is easier than ever for workers to eat outside the office. There are hundreds of fast-food joints, dozens of casual dining restaurants, and hot soup and delis available in almost all supermarkets.

Few people will set for a bowl of microwaved chicken noodle soup when there is a hot fresh cup of chowder for sale across the street. If there are a dozen restaurants across the street the breakroom cannot compete.

Take Out

The person who is too lazy or too tired to cook after work no longer has to settle for a can of soup. An incredible variety of takeout food is available at the touch of an app thanks to GrubHub (NYSE: GRUB) and Uber Rush.

Why settle for a bowl of canned tomato soup, when you can order a pizza, a steak, Chinese, Thai, Sushi, Indian, Mexican, etc., through your phone? A tired mom facing a grumpy husband, and two hungry kids can make herself into a hero by using GrubHub to order a meal from the family’s favorite restaurant. If the same mom reaches for a can of Campbell’s she will get nothing but complaints from the family.

Therefore, GrubHub is Campbell’s most disruptive “competitor;” because it can offer fresh, professionally prepared meals, delivered to your doorstep at the press of an app.

Private Label Brands

The greatest menace to Campbell’s is private label brands, that is the lower-priced company-branded prepared foods sold in supermarkets and dollar stores. These damage Campbell’s by stealing the less-affluent customers that cannot afford GrubHub.

Kroger (NYSE: KR) has undoubtedly done tremendous damage to Campbell’s by using its soups as a loss leader. I have seen Kroger brand soups on sale in Colorado for as little as 50¢ a can.

The Dollar stores are almost as bad, Dollar Tree (NASDAQ: DLTR) subsidiary Family Dollar’s house brand soup sells for 70¢ a can in Colorado. Campbell’s soups sell for $1.69 a can at my local supermarket.

A growing problem for Campbell’s is private-label supermarkets like Aldi, Lidl, and Trader Joe’s. These German-owned emporiums sell mostly private label prepared foods at much lower prices than named brands. Some of them like Trader Joe’s only sell their own private labels.

The king of private labels, Aldi is planning to invest $5 billion to expand its U.S. footprint to 2,500 stores by 2022 and upgrade its existing locations, Fortune reported. To add to Campbell’s nightmare, Aldi is selling its brands online and offering same-day home delivery from Instacart in the Chicagoland area.

The Death of Television

Old-school brands like Campbell’s are heavily dependent on advertising and centralized media like television. The ads establish the brand’s identity and convince consumers to accept it.

Almost half of Americans under 45 no longer watch traditional television, a study by Hearts & Science found. Around 47% of millennials (21 to 35-year-olds) and Generation Xers (35 to 53-year-olds) were “unreachables;” meaning they no longer watched the traditional TV platforms where the commercials run.

Around 66% of video watched by persons under 45 is without commercials, Hearts & Minds found. That means companies like Campbell’s have no good way of reaching those viewers with their advertising.

Things are getting worse because one in three households of Americans under 35 lacks a cable or satellite TV subscription, Hearts & Science estimated. The amount of time Millennials spend watching traditional TV has fallen by 30% over the past six years. The situation is especially perilous for Campbell’s because Millennials are expected t to become America’s largest next generation next year as the Baby Boomers (those born between 1945 and 1965) die off.

This benefits private label merchants because those viewers are most likely to reach for the cheapest can of soup when they go shopping. Campbell’s faces a dismal future in which a large percentage of the American population may not be aware of its existence.

Campbell’s has a Lot of Value Left

The horrendous reality Campbell’s is facing is an American middle class is abandoning prepared foods and a working class is buying private label. That either makes Campbell’s a slowing-dying dinosaur or a value investment.

Campbell’s has a lot of value left, the company still controls about 40% of America’s $4.5 billion processed soup market. The company paid a dividend of 35¢ on 30 April 2018, which was good for a stock with a price of $34.60 on 25 May 2018.

My take is that Campbell’s is a value investment because of its brands and distribution network. A shrewd marketer can turn this company around and make it profitable by taking advantage of new marketing channel.

A smart move by Campbell’s would be to sell directly to consumers through venues like Amazon (NASDAQ: AMZN) and Instacart. Another clever ploy might be to strike private label deals to offer exclusive “house varieties of Campbell’s soups” with large retailers like Amazon, Walmart, Kroger, and Aldi.

The death of Campbell’s soup is greatly exaggerated that makes this American icon a very risky value investment. Campbell’s is cheap and making money but it is on some very dangerous ground.