Conagra (CAG) bets on consumer psychology to drive future demand and growth

Conagra Brands Inc. (NYSE: CAG) reported strong results for the third quarter of 2021 which surpassed expectations. Net sales increased 8.5% to $2.8 billion helped by the increase in at-home food consumption due to the COVID-19 pandemic. Adjusted EPS increased 24% to $0.59, driven by higher gross profit.

Conagra has benefited significantly from the changes in consumer behavior during the pandemic as people spent more time indoors which led to cooking more meals at home as well as an increase in snacking. People also started purchasing their groceries online which led to a growth in ecommerce. Conagra expects these behavioural patterns to continue for the foreseeable future and believes it will benefit the company in terms of higher demand and growth.

Ecommerce

On its quarterly conference call, Conagra stated that it outpaced total edible retail sales in ecommerce growth each quarter throughout the pandemic. In the third quarter, Conagra saw ecommerce growth of 89% versus total edible ecommerce retail sales growth of 81%. The company also grew its share in ecommerce across 76% of its brands over the past 12 months.

According to Conagra, young millennial customers are more likely to shop online than in-store. Once customers start to shop online, 50% of them are likely to continue this habit while around 20% are likely to become heavy users of a brand. The company also believes that online shoppers tend to have more brand loyalty than in-store shoppers. Conagra continues to invest in ecommerce as it believes there is a high opportunity to generate significant returns from this channel.  

Changes in consumer behavior

Based on certain historical data, Conagra believes that changes in consumer behavior that occurred during crisis times, such as recessions, have continued even after the recovery. The company expects this to happen with the current pandemic as well.

According to psychology experts, it takes 66 days on average for a new behavior to become a habit. After 400 days of the COVID-19 pandemic, the company believes customers have adapted to having meals at home and expects this pattern to continue even after the crisis subsides.

Looking at data from states that have been the most open and the mobility of their residents throughout the pandemic, the two-year growth rates in retail sales are materially higher than pre-pandemic levels and have stayed fairly consistent as states reopen and stay open. This indicates that even though people have started going out, they prefer to eat at home.

During the third quarter, Conagra saw net sales in its Grocery and Snacks segment increase nearly 11% year-over-year to $1.1 billion helped by strong growth in staples and snacks brands such as Act II, Slim Jim, Snack Pack, Chef Boyardee, Libby’s and PAM.

In addition, the adoption of remote work and an increased shift towards at-home entertainment has led to higher demand for frozen foods which is likely to continue post-pandemic. In the third quarter, sales in the Refrigerated and Frozen segment grew nearly 12% to $1.2 billion.

Outlook

For the fourth quarter to date, Conagra has seen a continued increase across its retail segments compared to pre-pandemic demand levels driven by higher levels of at-home food consumption. However, the foodservice channel remains challenged. The company expects Q4 organic net sales to decline 10-12%. For fiscal year 2022, Conagra expects organic net sales to grow 1-2%.

Click here to read the full transcript of Conagra Brands Q3 2021 earnings conference call