Is Big Food in a Funk?

Why the top food & beverage conglomerates are failing and how can they fix it

 If Big Food is in a battle for survival then perhaps the grocery store is the battle field. While Millennials may be shunning traditional outlets when buying food (Are Supermarkets a Daycare for the Elderly?), it seems that even those who do wander through the store are making different choices: circulating the perimeter, focusing on produce and choosing fresh, local, often even unknown brands in lieu of the processed foods found in the center aisles. Traditional leading brands of processed food, backed by heavy advertising on television and media, are failing to hold on to its customers.

The food landscape is being torn apart and the status quo of the past 50 years is undergoing a vast transformation. This is not being caused by the food companies themselves nor by government actions, but by consumers (or prosumers). Consider this: since 2009, the top U.S. food and beverage companies have lost an equivalent of $18 billion in market share. These companies have grown and consolidated creating behemoths that are slow and sluggish to change the course of their direction.

Big Food, a phrase used by the media to describe the world’s largest food companies, are feeling the heat. Archer Daniels Midland Co., Coca-Cola Co., Mondelez International Inc., Campbell Soup Co. and others all reported lower revenues and gross profits in 2016. Traditional supermarket sales are projected by IGD to fall over the next few years, while overall food and grocery sales are expected to rise 13% through 2020, so therefore the market share of superstores and hypermarkets will be off by 6%.

This could make Big Food easy prey for specialized finance houses such as Brazil’s 3G & savvy investors such as Warren Buffet, to lead industry consolidation of food and beverage business and drive improved profits through rationalization and cost cutting. 3G helped Heinz buy Kraft in 2015 and the InBev purchase of Anheuser Busch several years prior. The beverage conglomerate is now picking up craft breweries left and right, reflecting where consumer trends. For the first time in history, the craft beer sales are now 10% of the market. But it isn’t just Big Beer that faces disruption; Big Food faces the same challenges. What craft beers have been doing to Big Beer local, organic and niche foods are about to do to Big Food.

How did we get here? When did consumers fall out of love with breakfast cereals which were once considered a fundamental part of the most important meal of the day? Author Michael Ruhlman has dubbed the cereal aisle as the most dangerous in the grocery store. Sales of orange juice, once considered a health food dropped 13% in four years. By some measurements (sugars, for example) juice is not considered much healthier than a serving of soda, sales of which have also declined by 20% in a six year period and have been surpassed by bottled water sales, according to Beverage Marketing Corporation. A CBS News article points out that while soda has dropped, soda companies at least are not suffering: Dasani, owned by Coca-Cola, and Aquafina owned by PepsiCo are the top two selling bottled water brands. Meanwhile, organic food sales have more than tripled in the last decade and now over 82% of US households buy some type of organic product, according to the Organic Trade Association. It’s no surprise companies such as Aldi and Lidl are expanding their produce aisles to accommodate this higher demand in organics.

So what is happening? Two factors are at play here. Firstly, there is an obvious trend toward healthier eating or what is perceived as healthier. That is, local, organic, simple ingredients. Secondly, consumers are still seeking out convenience as they have in the past, but more so in foods that have clean labels and offer a feeling of transparency and not chemically laden labels that confuse them.

While boxed macaroni with powdered processed cheese is fairly convenient, it is not considered fresh or healthy. Meanwhile, grocery stores that offer premade and ready to eat macaroni and cheese from self service bars see those sales growing and in combination with salad bars these offer a complete meal in a quick, grab ‘n go convenient way.

The most recent disruption in the food industry occurred when Amazon purchased Whole Foods. While some may have seen this as shocking at first, (Amazon did its best to keep the deal under wraps, of course!) there are numerous opportunities for synergies. Amazon has been talking about moving to brick and mortar for a long time; Whole Foods strengthens Amazon’s reach into cities and provides space and warehousing opportunities. Two, the customer base is right in line with Amazon’s primary target audience: affluent people who want healthy food with clean labels. Three, Amazon will now be able to significantly grow its AmazonFresh program; who better to assist this than Whole Foods, the mainstay of healthy, fresh foods, particularly with its line of private labels? Finally, Amazon has impressive growth plans and is aiming to be one of the top five grocers by 2025. So, despite Whole Foods less than desirable sales in its last two annual reports, the opportunities affords Amazon the chance to create new markets, new sales.

 Will Big Food slim down?

 As large and medium sized food companies struggle to cope with the changes with these challenges they may pursue three traditional avenues of cutting costs: substitutions, shaving and rationalizations. These are the same ones they might expect to be implemented if acquired.

1)     Substitutions

Finding a way to cuts costs in a food environment offers limited options. One is clearly to find cheaper sources of raw materials, packaging and logistics. In such an environment companies employ resources seeking alternatives and search all corners of the earth to find them. Chinese, Indian and manufacturers based in lower cost countries can benefit from these changes at the expense of traditional suppliers, and technologies that provide similar flavor, mouthfeel or meet label requirements at a reduced cost can gain new markets quickly.

 2)     Shaving

If a food company feels that the consumer experience can be met through using less of the expensive ingredients or packaging (10-20% cost saving) then the current environment may precipitate that decision.

 3)     Rationalizations

Reducing product lines, rationalizing the number of options, closing production lines or factories could be a consequence of the new market and accelerate as the industry sees mergers and acquisitions. 

Can Big Food fix itself to grow again?

Customers are looking for simplicity, both in their food labels and in their processed foods, and successful food businesses have to deliver to save both their company and brands that were once the staples of our pantries. Big food must:

1.      Sell ‘profit-poor’ lines in the portfolio

Companies are already trying to divest of products or brands showing declining profits. For example Unilever announced in April it would sell its margarine and spreads business, fortifying its bottom line shortly after it denied Kraft entreats to buy. It went on to buy a non-GMO and eggless mayo and catsup maker, Sir Kensington’s. These moves restructure their portfolio to reflect the changing perception of prosumers.

2.      Purchase small local, organic or niche brands and put them on more shelves in new geographies.

Murray's cheese, once a small company in New York, is now achieving national recognition as part of Kroger’s line of specialty cheeses. General Mills did this with Annie’s, a small organic pastas and snack company. Hain Celestial is a multibillion conglomerate of organic and specialty foods and is continued that strategy by purchasing UK-based Premier Food’s for ￡200 million.

3.      Craft new improved own brands.

Consumers are learning that many specialty foods offer a ‘generic’ alternative. Companies like Wal-Mart have done well in this area. Kroger’s has been pushing its Simple Truth line of products that reached $1.2 billion in sales in two years. The name itself is quite ingenious and pushes into territory previously dominated by Whole Foods. When it comes to trendy terminology, organic certainly takes the cake and any grocery able to provide ‘organic for less’ would be well to do so. Trader Joe’s is the epitome of this and aligns with consumers’ two main non-negotiables: healthy, fresh food and simple meals packaged and ready to make with clean labeling.

What about the Future for farmers, food ingredients and other suppliers to Big Food 

All said, if your main customer is Big Food you may be in trouble. General Mills, Mondelez, Del Monte or Kellogg’s previously thrived off the growth in convenient, processed foods but are being challenged as consumers are rejecting these products. They may fight this through businesses consolidation, mergers or acquisitions, but that strategy comes at a cost to their suppliers. In turn these suppliers may need to consider new ways to provide better consumer experiences in a new digitally connected world:

 Option 1: Find new customers.

If the food industry is re-fragmenting then this will create many new but smaller customers and their needs and demands will be different. Look to restructure sales and marketing efforts to accommodate these new customers profiles who will require a higher level of service to their needs.

 Option 2: Go directly to the consumer/prosumer.

For food ingredient suppliers, producers and farmers this is probably a revolutionary concept. In the new connected world, however, it is possible to consider connecting with your customer, consumer like never before. The continued explosion of food at farmer’s markets, food coops shows how people want to know more about where their food comes from. Can farmers consider using the internet to build their own ‘farm to table’ model? Should food ingredient suppliers consider developing their own consumable products for sale directly to consumers?

Benjamin Franklin once said, “When you're finished changing, you're finished.” Business people understand that all things change but the changes Big Food are facing cannot be met through incremental adjustments. It is a seismic shift in the food retail landscape directly affecting all members of the food supply chain, from farmer to grocer, and forcing the industry to drastically alter supply chain relationships nearly 100 years in the making.

Thanks to Alexa Potocki for help writing this blog. https://www.dhirubhai.net/in/alexapotocki

To learn more about these and other topics related to food and farming, visit Alltech’s Ideas Lab https://go.alltech.com/idealab-signup