TreeHouse 2020 - A Massive Undertaking

During last weeks 2nd Quarter Earnings Call, TreeHouse (THS) Chairman Sam Reed announced the launch of TreeHouse 2020, a comprehensive strategic plan to restructure and realign their fundamental go-to-market presence and supply-chain assets so as to best compete in the private-label marketplace that lies before rather than behind them, They also announced a reduction in their earnings guidance for the rest of the year, to which the stock dropped 11.5% on the day.

TreeHouse has a textbook private label strategy with strong fundamentals based upon value-based and open-book pricing. They also have a clear and well founded “strategic compass” for evaluating both Customers and Categories. My concern is whether they can execute their strategy given the size and complexity of their business, the changing domestic marketplace, and their significant investment in plants and operations built upon the old NBE OPP/Value model for private label.

They have indicated that a huge ”unlock” for them is the potential for production efficiencies arising from the analysis of each SKU not only by customer but also by production line in their plant.While this kind of customer profitability based SKU rationalization exercise has been SOP for private label manufacturers for as long as I can remember, the fact that they plan to execute it across 1,400 unique customers, 23,000 SKU’s, 30+ product categories, and 600 production lines across 50 plus plants is truly amazing.

The fact that that thirty-six customers account for approximately 80% of their earnings, may make the exercise easier, as it may allow them to focus on the consumer insights gleaned from working with these customers. How the other 64 top 100 customers will appreciate the manner in which their consumer insights and needs are addressed will be interesting.

Finally, what will this exercise mean to the long-term viability of their existing manufacturing assets as the market potentially moves away from their historic capabilities/utilizations. THS’ repurposing of some Wisconsin packaging equipment to start their foray into K-cup production, which has developed into probably their most lucrative product category, borders on the legendary. Similarly during the recession, they responded to the needs of a German retailer, whose limited assortment of items required pack sizes and case configurations different from those demanded by supermarkets. They had the foresight to realize that logistics and supply chain efficiencies associated with getting the products to market, made for a “good business for them to have”. This true and complete customer and product profitability analysis, built in part upon such geeky techniques as “activity based costing” and enabled I’m sure by the information obtained from THS’ long running commitment to SAP gives them the tools to allow them to make these analyses and decisions. Still, gathering the necessary consumer information with their customers and communicating the opportunities arising from their analyses back to them will be challenging.

Sam Reed recognizes that the challenges ahead of them will be different than those they have faced, if not recognized, in the past, and he has gathered a new management team of professional managers to address those challenges. He even jokes that he may be the only cowboy in the group and that is a good thing.

What’s amazing is that a company which is only twelve years old, is being forced by the demands of the rapidly changing marketplace to engage in a radical transformation just like their branded CPG competitors such as Kraft-Heinz, Campbell etc.

How the stock market will react to THS’ responses to the changes in the GPC consumer market is still to be seen, but if the market's reactions to the first two earnings releases this year is any indication the stock could be in for a bumpy road. I personally believe that THS is in right business and has the right plan. It may just be more expensive and take longer for them to realize their long-term potential than originally anticipated.

I look forward to their third quarter earnings call, to learn how they are progressing.