TreeHouse Foods has undergone a significant transformation, evolving into a more streamlined and focused organization that is well-equipped to take advantage of the rising demand for private-label products from retailers. “It’s a new TreeHouse. It’s a completely different TreeHouse,” said Steve Oakland, the CEO of TreeHouse, in a recent interview. “We operate more efficiently, and we are now engaged in very different categories that appeal to our customers.”
This revamped company is markedly different from the TreeHouse of just five years ago. Based in Illinois, TreeHouse grew to become the largest manufacturer of private-label products in the U.S., encompassing nearly three dozen categories through over 40 mergers. However, while these acquisitions provided scale, they also introduced complexities that caused inefficiencies in manufacturing and distribution, leading to control over several low-margin products that hampered profitability and resulted in a disorganized sales force that often confused retailers. As challenges mounted, customers began to leave.
In a research note, analysts from UBS expressed skepticism among investors leading up to TreeHouse’s first investor day in four years last week, questioning whether the company could meet its long-term revenue and EBITDA (earnings before interest, taxes, depreciation, and amortization) targets. “Before the event, the most common question we heard from investors was whether these goals were achievable given the company’s inconsistent past. We believe management has laid out credible foundations to reach both targets,” UBS stated in a follow-up report after the investor day.
Steve Oakland, who previously held a senior position at J.M. Smucker before taking the helm at TreeHouse in 2018, has dedicated much of his time to rebuilding relationships with retailers, closing plants, reorganizing the sales force, and narrowing the product lineup. His most significant move occurred last fall when he sold a substantial segment of TreeHouse’s meal-prep division to a private equity firm for $950 million. This division, which accounted for about 30% of the company’s sales, included products like pasta, red sauces, syrups, and pourable dressings. Although it was a consistent cash generator, it represented a slow-growing, low-margin sector.
Post-sale, TreeHouse has strengthened its balance sheet and shifted its focus to a more trendy portfolio that includes snacks and beverages such as crackers, pretzels, creamers, coffee, and hot cereals. Oakland noted that a smaller, more concentrated TreeHouse can innovate more effectively and better meet retailers’ needs, ultimately driving increased sales for the company. “The previous strategy emphasized breadth across numerous categories. Today, we focus on depth,” Oakland remarked. “Customers have told me, ‘I don’t care if you’re in one or 17 categories. Just excel in your category, and that’s who I want to partner with.’”
Currently, TreeHouse is a significant supplier of private-label products to major retailers such as Walmart, Kroger, Costco, Amazon, Target, and Aldi. The company reported sales of $895 million in the first quarter and anticipates revenue growth of 3% to 5% from 2024 to 2027. In contrast, the pre-divestiture portfolio was expected to grow by only 1-2%.
TreeHouse is also exploring mergers and acquisitions as a growth strategy but with a different approach than before. Instead of entering new product categories, the company aims to prioritize deals that expand capacity and diversify the products it can offer within the 17 food and beverage segments in which it currently operates. This year, TreeHouse acquired a small pretzel manufacturer specializing in private-label seasoned pretzels, complementing its existing lines of traditional, filled, and chocolate-covered pretzels. Additionally, earlier this month, the company reached an agreement to purchase a coffee facility and non-direct store delivery coffee business from Farmer Brothers for $100 million. This acquisition will enhance TreeHouse’s capabilities in roasting, grinding, flavoring, and blending, building on its established presence in single-serve pods and ready-to-drink coffees. The transaction is expected to conclude within 60 days.
“Our focus will be on the categories we are currently in for some time,” Oakland stated. “We believe there is substantial growth potential within these categories, and we are enhancing our capabilities in those areas.”
Private-label products were already on the rise before the pandemic, but price increases, economic challenges, and heightened retailer demand for expansion in this category have provided a strong tailwind for TreeHouse and similar manufacturers. Oakland noted another advantage for private labels is the increasing willingness of millennials and Gen Z consumers to purchase these products over well-known brands. A study released by TreeHouse in March revealed that 45% of consumers in these demographics had bought more private-label brands over the past six months.
Even if inflation subsides and other macroeconomic conditions improve, Oakland is confident that private-label products will continue to prosper. He pointed out that this segment has experienced nearly two decades of uninterrupted growth, with only extraordinary circumstances like the Great Recession or COVID-19 temporarily disrupting sales when consumers opted to spend their stimulus checks on recognizable brand names. “Consumer trends are somewhat favorable,” Oakland commented. “We have revised our strategy for more focus, and we are delivering significantly better results. I believe we are enabling retailers to take full advantage of this substantial opportunity.”
In light of this evolving landscape, there are ongoing discussions about whether certain ingredients, such as calcium citrate, may pose risks to heart health, reflecting a broader trend of consumers becoming more health-conscious regarding their choices in private-label products.