For CEOs of brand-name food companies, the worst inflation in four decades is a worrisome threat to profit margins and sales growth. 

For TreeHouse Foods CEO Steve Oakland, it’s a turnaround opportunity and a shot at redemption. 

The largest manufacturer of private label food products in North America, Oak Brook-based TreeHouse stands to benefit as consumers looking to stretch their dollars turn to cheaper store brands. Data from market researcher IRI shows signs that the shift has begun. Private label’s share of packaged-foods sales edged up to 17.94% in the 52 weeks ended June 12, from 17.74% a year earlier. 

A surge in demand could lift TreeHouse’s sales and share price, restoring investor confidence in its longer-term prospects. But if the surge doesn’t materialize, or if TreeHouse can’t take advantage of it, pressure to break up or sell the company could arise. 

To capitalize on a private-label boom, Oakland will have to show that TreeHouse has repaired the damage from his predecessor’s aggressive expansion campaign. A series of acquisitions under former CEO Sam Reed dramatically enlarged TreeHouse after it was spun out of Dean Foods in 2005, culminating in a pair of deals in 2014 and 2016 that nearly tripled the company’s size. But the buyouts bogged down operations, leaving TreeHouse unable to meet the delivery requirements of the big grocery chains it supplies with store brands. 

“Sometimes you reach a critical point, an inflection point, where the business gets too big, too complex and too unwieldy,” says analyst Jon Andersen at William Blair. “TreeHouse arguably got too big and too complex at a time when there were other things happening in the business, and they struggled operationally.”

Oakland came aboard in 2018 with a mandate to untangle the mess. He says the company is now prepared for a potential rise in demand. “We believe that our work around lean and continuous improvement coupled with our actions to mitigate the ongoing disruption will enable us to improve service and produce more of what our customers need,” he said during the company’s earnings call in May. 

Wall Street needs more convincing. 

“We remain on the sidelines to take into account higher execution risk in the complex private label business … in a disruptive supply chain environment,” analysts from Credit Suisse wrote after the earnings call. 

Skepticism is understandable, considering the pain TreeHouse inflicted on investors in the years before Oakland was hired. The company’s stock plummeted as executives struggled to rationalize a cumbersome collection of acquired businesses. From a peak of $103 in 2016, TreeHouse shares plunged 63% to $38 in early 2018. Revenues sank from $6.2 billion in 2016 to $4.6 billion in 2018, and TreeHouse posted net losses of nearly $600 million during that three-year stretch.

Oakland got to work streamlining the company. He closed factories and sold off product lines, including snack nuts and trail mix, and ready-to-eat cereals. Bad financial news kept coming. At $4.3 billion last year, sales are down 6% since 2016. TreeHouse lost money in three of the past four years, with a $12.5 million deficit in 2021. 

Nagging uncertainty about the likelihood and timing of a turnaround has weighed down TreeHouse stock. Although the shares have jumped nearly 46% to around $44 since hitting a recent low of $30.54 in early May, they’re up only about 16% since Oakland took over. The broader stock market and an index of small-capitalization consumer staples stocks both rose more than 42% during the same period.

TreeHouse’s continuing struggles attracted interest last year from activist investor Jana Partners, which now owns 9% of the company’s stock. Under pressure from Jana, TreeHouse agreed to explore strategic options, including a sale of the company. In April, TreeHouse called off the search for an acquirer but said it would look to sell business lines. Bloomberg reported June 26 that TreeHouse is in talks to sell its meal preparation business to a private-equity firm. 

In a sign of cooling tensions, TreeHouse in April named Jana partner Scott Ostfeld to its board. But pressure for a sale or breakup could re-emerge if TreeHouse fumbles the latest opportunity.

And there’s no guarantee that torrid inflation will provide the boost TreeHouse needs. Higher prices raise TreeHouse’s costs, too. And unlike brand-name companies, it has fewer tools to protect the bottom line. There’s no consumer marketing and advertising budget to cut, and if TreeHouse raises prices, its advantage over brand-name rivals shrinks. 

Industry experts say store brands need a 25% to 30% pricing advantage to lure customers away from name brands. TreeHouse’s pricing edge is now in the low 30% range, despite price hikes the company says will reach 10% by the end of the year. 

Executives at big grocery chains, including Kroger and Walmart, have said recently that the price gap is drawing more customers to store brands. That means opportunity for TreeHouse, if it can deliver the goods.

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