chew on this

Annie's Homegrown Hops Along on Growth Trail, But Greater Competition Looms

Posted by Dale Buss on November 12, 2013 04:37 PM

Annie's Homegrown caught lightning in a box with its line of organic macaroni-and-cheese products several years ago just as American moms were warming up to better-for-you foods for their kids. And while Annie's remains in an expansionary mode, there are new questions about whether it can continue its explosive growth.

For its part, Annie's is bullish, having just announced it expects to expand snack production and distribution as a result of buying a plant in Missouri that already has been the out-contracted source of most of its cookies and crackers for more than a decade. Annie's wants to add product lines and distribution under its Cheddar Bunnies and Bunny Graham snack offerings.

The purchase "is an attractive business opportunity that will help us go after the significant untapped growth and profit potential in our snack business," CEO John Foraker said during a recent conference call with analysts.

And the Berkeley, Calif.-based brand continues to innovate. It has gotten good reception for a new bag format for its products instead of the boxes it always has used, Foraker said. And Annie's is getting raves for a new two-minute video under its "Good and Good" campaign that uses cute little kids, and child psychology, to show just how desirable the new Annie's mac-and-cheese pizza is. It reprises a Stanford child-psychology research exercise from a half-century ago known as the Marshmallow Experiment.

But that doesn't mean everything is as smooth as gooey pizza cheese for Annie's these days. For one thing, giant mainstream competitor Kraft not only is selling an organic Mac-and-Cheese product in its own esteemed lineup but also has reformulated some of its other macaroni-and-cheese entries to be more "natural" and compete better with Annie's.

Also, let's face it: Annie's mac-and-cheese, still its bell-cow product line, isn't vastly nutritionally superior even to mainstream competitors in terms of calories and fats. The main appeal of Annie's from the start has been that it's made from organic ingredients. And that's a "free-from" health proposition for which its customers must pay a premium at the checkout.

For such reasons, some investors actually are growing bearish on Annie's. "Annie's is seeing its first mover advantage quickly deteriorate," wrote an investment blogger on Seeking Alpha. Not only does Kraft have a much bigger distribution system, but purely organic brands such as Annie's are still having to fight supermarket chains "in an effort to get its products included in the main aisles of grocery stores and not the organic section."

Still, Foraker said on the call, "Momentum in our business and in the natural and organic food sector more broadly gives us high confidence that we can sustain rapid growth well into the future."

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