From stuffing-flavored chips to ghost pepper chicken noodle soup, companies are ramping up the competition in the grocery isles.
While retailers like Walmart (WMT) and Target (TGT) are plowing ahead with private labels, Campbell Soup Company (CPB) is doubling down on innovation, marketing, and increased distribution to sell its famous brands like Goldfish.
"It all comes down to ... creating the right value, which [is] not dependent solely on a price point," CEO Mark Clouse told Yahoo Finance at Campbell's investors day last week. "It is about, how do we add value in ways that are more differentiated and sustainable?"
Campbell estimates that product innovation will provide a 3% lift to annual sales, including a 4% to 5% lift in the competitive snacks business. The company projects annual sales growth to be around 2% to 3% long term, with snacks as the driver at a 3% to 4% sales growth.
The 155-year-old company is looking to reinvent itself with the recent integration of Sovos Brands and a potential name change. Its stock has badly lagged the market in the past five years, up 10% compared to the S&P 500's (^GSPC) 88% gain.
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Yet its quest for growth will be met with plenty of rivalry. This summer, Walmart introduced Bettergoods, a more premium private-label line with a price point of $5 for most of its 300 items.
Target has 45 private labels, which are being used to reinvigorate its chic "Tar-jay" aesthetic, and Costco continues to thrive with its Kirkland products.
As major retailers threw more weight behind private labels in the past decade, its perception shifted from "cheaper and lower-quality products" to sometimes being the "superior brand over the national brand," CFRA analyst Arun Sundaram told Yahoo Finance over the phone.
Circana's Sally Lyons Wyatt said the pandemic boosted the trend as every retailer and consumer packaged goods (CPG) company scrambled to get products on the shelves. Those working from home also started looking for more variety. As food inflation shot up, more shoppers embraced private labels.
The trend has since stuck. Year to date, unit sales for private-label salty snacks are up 5.6% compared to a year ago, while national brand unit sales are down 0.8%, per Circana. Private labels gained unit share across general food, shelf-stable beverages, refrigerated goods, and frozen goods in 2023.
Wyatt said the "ability to find coexistence [with private-label brands] is key" for CPG companies in the current environment.
"There are some categories that [consumers] probably always tend to look for more quality ... versus others where I might be willing to give up because of the price," she said.
Campbell has leaned into the spice and heat trend, like its microwavable spicy chunky soups, in an effort to keep its edge in broth and soups. But the segment was underinvested in by its former CEO Denise Morrison, Morningstar analyst Erin Lash told Yahoo Finance.
The company needs to refresh marketing and weave consumer insights into the product creation process to better respond to taste changes, Lash suggested.
Target's private-label snack brands' fall treats near the checkout area at one location in Jersey City. (Yahoo Finance)
Historical rivals like PepsiCo (PEP), Mondelez (MDLZ), Hershey (HSY), and Kraft Heinz (KHC) are also putting up a fight as Campbell diversifies into sauces and snacks.
"You do see some of the larger players that we're up against launching new brands. You see smaller entrepreneurial businesses coming in and you see private label in certain segments in snacks becoming a bigger part of the portfolio," Chris Foley, president of Campbell's snacks division, told Yahoo Finance.
Recently, the company has had success with premium-priced products with the integration of Rao's tomato sauce. "What we've learned about Rao’s is that a lot of the growth is not necessarily exclusively coming from high-income households," Clouse told Yahoo Finance.
National brands have to figure out the optimal price gap between their products and others', Bank of America analyst Bryan Spillane said to Yahoo Finance.
Campbell brands like Cape Cod or Kettle chips have price points that sit between private label and other national brands, which provides an advantage, Spillane said. But it's facing competition from PepsiCo's Frito, which is leaning into promotions.
Jars of Rao's sauces are displayed along a grocery store's shelves on Aug. 7, 2023, in New York City. (Spencer Platt/Getty Images) ·(Spencer Platt via Getty Images)
Increasing certain Campbell snack brands' national presence is key to building scale, per Spillane. Clouse said the company is consolidating and reengineering distribution routes, including buying back and combining Snyder's-Lance and Pepperidge Farm routes in certain markets.
The team claims it has already seen improved in-stock rates and service levels. "We're continuing to simplify our network ... consolidating our hub and depot network into fewer locations," Clouse said.
But whether Campbell's can win on innovation remains to be seen.
Sundaram said PepsiCo, Mondelez, and Hershey have "separated themselves from the others" in CPG, and he wouldn't put "Campbell's or even Kellanova (K) into that same conversation."
The three players seem to have figured out the trifecta of strong innovation, marketing, and product distribution. For example, Mondelez's Oreos can be found in every aisle, from movie theaters to gas stations to dollar stores, Sundaram said.
CPG names that have been "able to demonstrate that they can return to volume growth" have been rewarded by investors, Consumer Edge analyst Connor Rattigan told Yahoo Finance. Ones who haven't, on the other hand, are facing pressure as consumers become more discerning with their dollars.
Much of Wall Street is still waiting to see if all of Campbell's initiatives will pay off. The company currently has five Buy, 11 Hold, and four Sell ratings.
Spillane maintained his Underperform rating with a $46 price target. The rating "reflects concerns about organic sales growth in fiscal year 2025 given the current challenging conditions across US packaged foods," per his note to clients.
Lash gave the company a "medium uncertainty rating" due to "intense competitive pressure from national peers, private-label fare, and other niche natural and organic offerings," she wrote in a client note, though she set a "fair value estimate" of $61 per share.
JPMorgan analyst Ken Goldman has a more optimistic take with an Overweight rating. In a recent note to clients, he wrote, "We believe that the combination of Sovos’s strong growth and a self-help margin improvement story should give investors relatively high confidence that CPB can grow its bottom line as planned over the next few years (despite macro challenges)."
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Brooke DiPalma is a senior reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at [email protected].