ConAgra has spent much of the past decade transforming itself from a commodities-driven food company, focusing on trading and merchandising, into a branded goods business. Yet at the end of November 2012, ConAgra struck a truly transformational deal, when it bid to take over US packaged food business Ralcorp for about US$6.8bn, after debt was included. One rationale behind the deal was Ralcorp's large private-label business, which is benefiting from the squeeze on consumer spending.

The deal, which came after a failed bid to buy Ralcorp for US$5.2bn last year, is by far the largest the acquisitive ConAgra has struck in its history, and is set to close next year. With a common investor base of 45%-50%, the two appear to be an ideal fit. Combined, they will create a business with US$18bn in annual sales, making it one of the largest North American packaged food companies. More significantly total private-label sales will total US$4.5bn, making this North America's largest private-label food business.

According to industry analysts, private label now represents 18% of sales in the packaged food market in the US and has consistently demonstrated growth in excess of the overall food market over time. ConAgra CEO Gary Rodkin added, 'Clearly, consumer dynamics have changed since the recession and we expect growth in private-label food to continue to outpace growth in branded food. At the same time, we remain very proud of and fully committed to our brands.'

ConAgra expects to achieve around US$225m of cost synergies on an annual basis by the fourth fiscal year after the deal closes. ConAgra said that the buy-out should have a modest benefit on its fiscal 2013 financial results. The acquisition of Ralcorp is expected to be financed primarily with cash on hand, existing credit facilities and new borrowings.

Market position

Over the past decade, ConAgra has shrunk substantially as it cast off surplus brands and business, and refocused itself as a packaged-goods company. Though ConAgra is now one of North America's leading food companies, its revenues are only just over half the US$25.5bn it achieved in 2002. Its focus has also shifted. Back in 1998, over 50% of ConAgra's sales came from fresh meat and other commodities. However, now, all of its sales are from branded packaged foods.

The current rise in fuel and food commodity prices has exposed the risks of such a strategy, as higher costs ate into margins. Net sales rose year-on-year in FY12, which runs from the beginning of June to the end of May, with 37% coming from commercial foods and the rest from consumer foods. But operating profits and operating profits were both down. Yet ConAgra's strategy of raising prices to offset the commodity price rise seems to be bearing fruit as margins begin to recover.

Corporate strategy

As well as Ralcorp, ConAgra has been confident enough to continue acquiring businesses that fit with its strategy, bulk up its buying power and take it into faster-growing markets. In December 2011, ConAgra increased its stake in Indian firm Agro Tech – which markets food and food ingredients to consumers and institutional customers in India – to take a controlling stake of nearly 52%.

Another significant acquisition, in August 2012, was Unilever's North American frozen meals business, which includes the licensing rights to the Bertolli and P.F. Chang's brands for US$265m. These frozen meal brands generated around US$300m in sales in 2011. The transaction is expected to close in Q312, and is ConAgra's fifth acquisition in the last 12 months, including Odom's Tennessee Pride, which made ConAgra a key player in the frozen breakfast sandwich category.

And in the past month, ConAgra has announced the acquisition of Del Monte Canada for an undisclosed amount. That deal includes all the company's branded packaged fruit, fruit snacks and vegetable products. Other acquisitions include last year's deal to buy the National Pretzel Company, which brought almost US$200m in net sales last year. And late in fiscal 2012, ConAgra acquired Kanagaroo Brands' pita chip business.

All these acquisitions fit with ConAgra's Recipe for Growth, a five-year plan announced in 2012 that aims to achieve 6%-8% comparable growth in earnings per share over the long term. Under the plan, ConAgra intends to focus on international growth, which accounted for just 10% of sales in FY12. At the beginning of FY12, ConAgra's international presence was mainly in Canada and Mexico. Now it is looking to expand its presence in high growth markets such as India.

Meanwhile, the company has overhauled its product development and marketing operations to focus on healthier products. The company is banking on innovation – rather than product extensions – to keep consumers interested in its brands. For example, in FY08 it launched a new line called Healthy Choice Café Steamers meals that it markets as microwaveable, nutritional, restaurant-standard meals, and which saw sales worth US$100m in the year.

It has also introduced prominent nutritional guidance on its packaging for many of its products, and adjusted their nutritional profile by, for example, reducing their sodium content. To complement these moves, in June 2008 ConAgra struck a much-lauded deal with consumer-goods firm Procter & Gamble that will give it access to more user-friendly packaging and nutritionally enhancing food ingredients.

Strategic risks/opportunities

Marketing is certainly key to ConAgra's strategy, building on Mr Rodkin’s own expertise in this area. ConAgra, which has long been criticised by investors for its lack of branding power, now has a redesigned logo (a plate with a smile and a spoon) and is pushing for better shelf space at retailers. In order to push its new products, the company has been offering coupons and staging other promotions so as to encourage consumers to try their new fare.

In early 2012, Wal-Mart – the company's largest customer, accounting for 17% of revenues - named ConAgra as its second-largest multinational supplier. That was a coup, but there is no guarantee that Wal-Mart or other large customers will continue to purchase ConAgra's products in the same quantities or on the same terms as in the past. Increasingly powerful retailers continue to demand lower prices from suppliers, as they develop their own brands.

Another risk is litigation. After suing Big Tobacco for hundreds of millions of dollars a decade ago, lawyers have been circling around food manufacturers. Over a dozen lawyers have filed 25 cases against industry players like ConAgra, PepsiCo, Heinz and General Mills, claiming that they are misleading consumers and violating federal regulations by wrongly labelling products and ingredients. ConAgra's Pam cooking spray, Swiss Miss cocoa products and Hunt's canned tomatoes have come under particular attack. Other lawyers have focused on food marketed as 'healthy' or 'natural', which they say are subjective claims that have no federal standard, unlike the label 'organic'.

Though some of these cases have been dismissed, the pressure will not go away. Consumers are growing increasingly aware of their eating habits as rates of heart disease, Type 2 diabetes, obesity and other health problems rise. And state and local governments are also worrying about the escalating costs of caring for people with those diseases and keen for food companies to play a role in promoting health.

Other risks lie closer to home, among ConAgra's workforce. Since 2002 the company has cut its employees by over 70% - from 89,000 to around 25,000 – through a combination of lay-offs and divestitures. Of the remainder, some 53% of the company’s employees are party to collective-bargaining agreements. Although the company is keen to emphasise its investment in its employees, it is likely that general staff morale remains fairly low. Still, ConAgra has managed to put some of its food safety alarms behind it, and with the recent Ralcorp acquisition, the company is once again cautiously confident.

Click here to subscribe to The Economist