In November 2007, Ralcorp Holdings, one of the biggest manufacturers of store brand groceries, bought the Post brand (iconic products such as Honey Bunches of Oats, Post Raisin Bran, Grape-Nuts, Spoon Size Shredded Wheat, Pebbles and Post Selects,….) from Kraft for $2.6 BN (click here) in an all-stock deal.
Many people, including myself, wondered whether a private label manufacturer like Ralcorp can handle a national brand in a slowing economy?
One line of thinking questioned the logic of a private label company, that is gaining share from national brands, in buying a brand at a high valuation (2.6 times sales). After all, the marketing activities (promotion, advertising) in selling a branded product are much different than those involved in selling a store brand to a store. Also selling a branded product with store brands creates internal competition. This is what had led Ralcorp to sell off its brands (Chex, Beech-Nut) many years ago.
What worked for Ralcorp is that private labels traditionally have had a small market share in the cereals market (around 13%).
Ralcorp announced their FY09 Q1 results last week (click here). The sales contribution of Post was $256 MM (which is nearly the same run rate as at the time of acquisition). I estimate the profit contribution of the Post brand was more than $50 MM in the quarter.
Hats off to the Ralcorp folks and to the Post guys to have posted such strong results in a recessionary environment!