The Campbell Soup Company (CPB) is moving into the pasta sauce space through a $2.7 billion deal with Sovos Brands (SOVO), a partnership which Campbell President and CEO Mark Clouse reiterates is "not a deviation, not a departure, it's about stepping on the gas and going forward with it."
Clouse sits down with Yahoo Finance Executive Editor Brian Sozzi to discuss the strategic acquisition of Sovos' landmark sauce brand, Rao's Homemade, which will expand Campbell's own variety of frozen meals and products. "We will not touch the sauce," Clouse assures fans of the brand's original recipe.
JULIE HYMAN: Campbell's Soup announced the acquisition of Rao's Italian sauce owner Sovos Brands earlier this week.
Yahoo Finance Executive Editor Brian Sozzi sat down with Campbell's Soup CEO Mark Clouse to discuss the acquisition, the anatomy of a tomato sauce.
I'm looking forward to that, inflation, and more MARK CLOUSE: You know, I think we've been pretty clear strategically that what we really believe has been the power of the transformation in Campbell has been focus.
And as we think about focus, what we've been building is this very, very clear, one geography, two divisions, 13 categories, of which sauces is a big part of those 13 categories.
And as we look at the opportunities to add value and continue to strengthen, especially that meals and beverage portfolio, this ultra distinctive Italian source area has been just a significant source for growth and clearly a place where we don't play.
And so adding that into the strategy is not a deviation.
It's not a departure.
It's really about stepping on the gas and just going forward with it.
And that's why this was so I think such a great fit for us strategically.
You know why the price?
I think we've been very, very diligent as I would think people would expect.
And we really spent a lot of time trying to understand runway going forward.
That's the big part of this deal.
It's not one that's anchored on having to do 20 things differently or fix this or fix that.
It's really about that runway going forward.
And as we look at these businesses, the combination of first just inherent distribution expansion, where I think our commercial operations will be a great support to the great foundation that Sovos has built.
Household penetration and awareness on this brand, although impressive where it is, there's still a pretty wide range between Rao's where Rao's is and where traditional premium brands are.
And that's really in our wheelhouse.
Building awareness and driving household penetration is something that we understand really well and are excited about.
And then finally, you know, I've said this a couple of times.
A lot of times when you get into these, people will get excited about a brand and start expanding it into 50 different areas, all with no profit.
These guys have been very, very thoughtful and very consistent and expanding into categories where the equity of Rao's is powerful and the underlying profitability or the business models in place.
And those are just getting started.
So when you think about frozen, dry pasta, soup, all of these frozen pizza, these are all areas where we see just a tremendous runway ahead.
And that's why we felt great about the value and where we landed.
BRIAN SOZZI: Mark, I'm never amazed by the questions that come up after a company makes a big deal.
One question I saw out there on social media.
MARK CLOUSE: I know where you're going.
BRIAN SOZZI: Campbell's Soup?
They're going to change the recipe of the pasta sauce.
They're going to dumb it down.
They're going to make it less flavorful.
Can you address those concerns?
MARK CLOUSE: Yeah.
Look, head on, right?
We will not touch the sauce, right?
We just spent a pretty significant amount of money to buy something that we believe is really, really special.
And I can tell you, Brian, I was on the ground in Italy.
We have a tremendous partner that is somewhere between industrial genius and our artisan specialists in building this incredible, unique sauce.
And so I want everybody, please, I appreciate all the encouragement in social media, but we are not going to change it.
And look, if we want a little bit of proof point, we've been pretty consistent for 125 years with a pretty darn good chicken noodle soup that we guard with our lives to make sure that quality stays the same.
So please, everybody, feel good, we're going to protect that as we should, as we should.
BRIAN SOZZI: Well, I can back that up as a consumer of chicken noodle soup for about 40 years.
It's sure tastes the same to me as when I was eating it.
But Mark, you mentioned-- MARK CLOUSE: Absolutely.
BRIAN SOZZI: You mentioned, the product pipeline for Rao's.
What does that roadmap look like over the next 18 months?
Is this a brand where I'm going to walk down the frozen section, I see frozen pizza, but you know what?
I see Rao's garlic nuts made by the folks over at Campbell's Soup.
MARK CLOUSE: Yeah.
Well, look, I think the first thing I would just say is that the Sovos team, as I said, has done a masterful job building out a pipeline.
It was really one of the things that as we got into the diligence that we really were excited about and felt great.
And that's really evident across all the segments that they're currently in.
So I think you're going to see some pretty exciting expansion within the sauce area, as I mentioned, over the last couple of days.
They've got five SKUs right now in sauces that are at what I would call more critical mass distribution, over 80% of the ACV.
The drop off from the next five and beyond is significantly lower.
And so there's a real opportunity to build out this grocery destination for what is clearly this fast growing, ultra distinctive area.
That is something that we feel really good about.
In frozen, I also think that team just getting started and a lot of runway ahead.
I will say, though we do have a pretty unique and pretty capable frozen team that's working on desserts and bread.
And, you know, who knows what the future could hold as it relates to a frozen tiramisu.
Or I don't know about cannoli, that could be a tough one.
But you know what?
We got a lot of woods-- BRIAN SOZZI: That's tough one for me.
Sign me up for that.
I got it.
MARK CLOUSE: We got a lot of wood to chop already with the pipeline that's in place.
But yeah.
We're very excited about what this brand is going to be capable to do to extend into some other adjacencies.
BRIAN SOZZI: Lastly, Mark, before we let you go, a lot of focus in markets on the consumer price index.
We're finally starting to see prices come down.
Your company has or touched a lot of different commodities in that CPI basket.
Do you think we're set up for a deflationary environment.
next year?
MARK CLOUSE: You know, I really think that what we're going to see and I've been pretty consistent on this is that we're going to start to walk into a period where there's going to be more differentiation between different cost areas, where you may see some recovery in some areas, but we're probably going to still see some headwinds in other areas.
And we know in different parts of agriculture, there's different aspects of ingredients.
I do think we'll see some relief in some of the other structural areas.
But at the end of the day, we'll be out talking about guidance here shortly.
And I don't want to foreshadow any of that.
But I think consistent to what I've said the last couple quarters, this is a world where you're going to have some ups and downs.
