07 Feb 2009

Can a private label manufacturer manage a national brand?…the case of Ralcorp and Post Cereals

Raj Bhatt

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!

brand, Kraft, Post, private label, Ralcorp

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