Opportunities that Arrive During Inflation
dis·rup·tion:? “To Burst”
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In the business world, there is no greater ill than for a company or an industry, to become obsolete and rendered irrelevant through competitive innovation.? Often, obsolescence is the aftermath of disruption, a term that has become dominant especially during the past decade.? It is very apt that the Latin root for Disruption is “rupt” – meaning “burst”, and although “bursts” are often associated with disturbances and interruptions, “bursts” can also be construed as moments of creative energy and revelation.?
Plant-based disruption has reshaped the F&B landscape for quite some time.? Aside from the global macro-trend on wellness, there have been several factors that have catapulted plant-based disruption specially in the area of milk and plant-based milk alternatives.? These factors include:
1.????? Disruption of Traditional Channels in favor of E-commerce:? The rapid acceptance of all things plant would not have been possible without e-Commerce, which has leveled the playing field and reduced barriers of entry.? Innovative, small plant-based brands no longer have to compete for space in traditional retail stores, but can sometimes gather viral following through online presence and social media
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2.????? Advent of COVID, which exacerbated demand across selected F&B categories based on shelter at home mandates, creating at-home consumption occasions:? Demand shifted from convenience-focused beverages, like energy and sports drinks during COVID, to milk, plant-based milk, coffee and tea increased.? As such, trial of plant-based milks increased by 10 pts across all households from 2020 to 2021, with repeat purchasers reaching 3.6% of all triers
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3.????? Growing productivity for Plant-Based offerings in the Refrigerated Space:? Retailers rightfully allocate more space to products that are more productive – that is, offer more dollars for the space they take in their store.? Plant-based substitutes find it hard to challenge traditionally fastest moving categories in the store like milk.? However, from 2017 – 2020, despite commanding a productivity below 20% that of milk, plant-based milk productivity increased by 23% vs only 3% for milk.? Growth in productivity for plant-based milk made it attractive for retailers to allocate space to the category
Given these factors, plant-based milk during the L52 as of Dec 2022 ($2.2B) is about the same size than ‘Better for You BFY‘ milk ($2.6B), this is, milk with Organic, Lactose Free, Non-GMO, GF, Protein Claims and Hormone Free claims.?? Not accounting for Lactose Free milk, plant-based milk is ~45%+ times larger than BFY Milk.
There is, however, another element that has impacted the demand of plant-based milk which is not often talked about and that is inflation, which in itself is a macro disruptor impacting demand.? This effect has compounded in 2021 and 2022, as inflation in the US worsened and reached +8% levels, driving cost of goods upwards This has even been more pronounced for categories like milk and plant-based milk, seeing price/ mix growth of 13% and 10% L52 vs YA, respectively.? Since 2017, the gap in price between milk and plant-based milk has consistently eroded, declining by 20 pts.
Interestingly, the declining price gap between milk and plant-based milk is highly correlated with plant-based milk demand.? As consumers who previously refused to try plant-based milk given its high relative premium over other beverages like milk; the faster price/mix increase in milk vs plant-based milk, steadily eroded this barrier, increasing plant-base milk demand by 20% in 2020.
However, during the past year things shifted entirely and plant-based milk demand softened vis à vis that of milk.? Understanding the shifts that lead to a trend reversal are key as they will help plant-based manufacturers identify opportunities for improvement, especially next time inflation and other macro-economic factors increase trial.
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How Inflation led to Trial
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Prior to the past year an increasingly smaller difference between the price of milk and the price of plant-based milk reduced consumers’ ‘cost of trial’ or ‘cost of switching’ to plant-based alternatives.? The price / mix of milk increased at a faster rate than plant-based milk, likely given the later was already positioned at a premium, while milk has traditionally been a commodity.
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However, during the past 52 weeks, the growth trend in plant-based milk reverted, even when the price gap vs milk had been reduced to 45% (significantly lower than the 65% gap in 2017).? The reason for this shift can be potentially explained through:
·??????? Change in Consumer Sentiment – No Reason to ‘Stay’ Post Trial
·??????? Change in Retail Sentiment – Lower Plant-Based Productivity
·??????? Plant-Based Milk Consumers Trading Down – The Other Side of Inflation
Addressing each of the above will be most relevant to plant-based manufacturers as they seek to reap benefits from reduced barriers of trial for their product.
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Why did Plant-Based Milk demand soften L52?
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1.??? ?Change in Consumer Sentiment – ‘No Reason to Stay’
Sometimes, changes in the macroeconomic environment can spur trial, and when the right product meets the right unmet need, consumers shift from being casual ‘tryers’ to becoming ‘avid loyal buyers’.? This was the case for various smaller brands in F&B, which grew during COVID through trial, as they benefited from the supply chain issues faced by larger brands that led to their being out of stock.? ??
In the case of plant-based milk, the shrinking price gap between milk and plant-based milk elicited category trial, yet the effect was not sustainable, particularly during 2022.
One reason why those who tried plant-based milk didn’t ‘stay with plant-based milk’, may be linked to lack of fit between the product and new users need.? To better understand they underlying factors impacting retention we first need to look into cohorts where plant-based milk lost most penetration during 2022:? Higher Income Segments; Younger Cohorts (Millennials and Gen X); non-Caucasian groups (especially Asian, where plant-based milk has always over-indexed) and Households with Children.
Although higher income and younger cohorts may be more adventurous in trying new products and finding substitutes, ??Households with Children have been a traditional focus for dairy as a whole.? Lack of salient innovations targeting this segment may have been a reason why triers did not become loyal buyers.? ?Few innovations centered on key HH with Children offerings, include partnerships with Child oriented brands (e.g., Disney, Hasbro) as well as ‘Child centric’ products (e.g., flavored).?? Without understanding the previous surge in trial coming from a new cohort, the plant-based milk industry may have been too slow to react to fit new cohorts’ needs.? For instance innovation as a percentage of sales declined from 14% to 6%, from 2020-2021 to 2021-2022.? Of these innovations, most focused on Silk’s launch of an Oat Milk based product; with only one specific innovation from Ripple targeting kids, which featured sales growth of more than 65% since launch ($4M in 2021 to $18M end of 2022)
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2.??? Change in Retailer Sentiment – Lower Plant-Based Milk Productivity
?In 2020, during the COVID pandemic, productivity for plant-base milk grew at double the rate than that of milk.? However, since 2021, the trend shifted with plant-based milk growing in productivity by 4% per year, whereas in the last 52 weeks, milk productivity increased by 13%.? Shift in productivity likely led to retailers to allocate more coveted refrigerated space to milk, despite reductions in items on shelf by 2%.
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In particular, productivity for milk increase given the proliferation of half gallon pack size sales, which priced at a higher PPV, while being a faster moving item led to an increase in productivity for retailers.? Volume per unit in milk declined by 2.5% vs YA in 2021 and close th 1% vs YA in 2022.? In other words, retailers had an incentive to allocate more space to milk vs plant-based milk, in addition to the former’s well developed private label offering which is more margin accretive to retailers.
Going forward, as plant-based milk manufacturers try to erode the retail advantage of substitutes like milk, they will need to add to their sell in story the right combination of rapid turning pack sizes and innovative concepts to improve the category’s productivity.? Fortunately, the milk category’s focus on smaller pack sizes is not a sustainable strategy as consumers (especially Household with Children) will look for larget, better price packs given the broadened at home usage occasion, expanded since COVID.
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3.??? Plant-Based Milk Consumers Trading Down and Trading Up to Other Beverages – The Other Side of Inflation
So far we’ve discussed consumers who were willing to try plant-based milk, when faced with a smaller gap between milk and plant-based milk pricing.? On the other side of the coin, we also have consumers of plant-based milk that decided to trade down from plant-based milk to other beverages, including value-added milk; as well as consumers ‘trading up’ to other more premium beverages given the shrinking price differential between plant-based milk and other more premium beverages.? For instance, post the 2020 COVID effect, Carbonated Beverage, Energy Drinks and Sports Drinks all gained back share in the beverage market, vis a vis Milk, Coffee and other staples.
To retain future consumers plant-based milk may gain as a result of price inflation gaps, there will be increasingly a deeper need understand what specific claims and packaging consumers are willing to pay for vs not.? The threshold by which plant-based milk buyers shift to other beverages, trading up or trading down can only be minimized by understanding how to maximize the impact of key elements in the value proposition that justify to consumers the value they are paying for a particular good.? This is particularly the case for beverages, where multi-functionality is an essential category benefit.
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Leveraging Inflationary Shifts to Craft a Competitive Advantage
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Many karate techniques can use the opponents’ force against themselves.? If they push, you pull – and if they pull you push.? Similarly, in an environment where disruption and dealing with an increasingly mid-to-long term inflationary environment becomes ubiquitous, there are several strategies that can help manufacturers take advantage of the underlying forces impacting demand, to generate trial and welcome new buyers while keeping defensive strategies in check.
In an inflationary environment, usually brands that are either underpriced (e.g., Value or Private Label offerings) or over priced (e.g., Super Premium Brands), tend to be less impacted than all other offerings in between.? Although Plant-Based Milk has been traditionally priced at a premium over milk, and thereby more likely to be impacted negatively by inflation, recent steeper price growth in milk has countered the impact by reducing the barrier to try or the barrier to switch.
However, to take advantage on the lift of trial, Plant-Based manufacturers, as well as manufacturers of other products where comparable options are reducing the barrier to switch, need to have their pulse on the market to convert ‘tryers’ into ‘loyal users’.? This can only be achieved by:
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1.????? Anticipating the shift and being ready to provide a differentiated offering
Companies that anticipate a shift in demand know when the shift will happen, what type of consumers will suddenly try their product and how much benefit the brand stands to gain should a certain part of the new trials become loyal users.? By anticipating change, companies can gain enough time to design a differentiated value proposition and messaging that is most relevant to new users and ‘persuades them to stay’ once they have tried their brand.?
For example, ??we recently partnered with a Global Caffeinated Beverage Company with a wide portfolio, covering both super premium and value offerings, which are less impacted by inflation, as well as mainstream plus and premium offerings, more impacted by inflation.? Hence, offerings like a ‘ready to drink’ cappuccino would fall into a category less impacted by inflation; while offerings like premium roasted and ground coffee would fall into a more ‘middle of the road’ category with users likely trading down to other caffeinated categories like mainstream/ value roasted and ground coffee.
The engagement resulted in a view of new gains and net losses across the company’s wide portfolio, which help to craft strategic priorities based on expected changes from inflation.? Strategic priorities were based on anticipating change and were actionable as they targeted specific segments, while affirming differentiating tactics vis à vis competition, including the portfolio segments the company should leverage to target specific cohorts trading up or trading down. For instance, the company targeted messaging and promotions on their portfolio’s mainstream roasted and ground coffee brands to those most likely to trade down from the company’s premium offerings.? This way consumers were kept within the company’s brand umbrella, avoiding the traditional high cost of securing a new user. ?This type of engagement helped a global company successfully plan for an inflationary environment.
2.????? Having clarity into how best to manage portfolio profitability in a way that consumer willingness to pay is maximized
As inflationary pressures continue to rise globally, companies will be forced to gain a better understanding on 1) What features and claims can command a higher consumer willigness to pay, to increase the top line, and 2) What elements in the value proposition can be forgone, given consumer lower willingness to pay, to lower costs; and ulminately improve profitability.
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Recently a Snack Nuts company partnered with us to identify how they could increase their portfolio profitability in a declining segment.? ??We first identified short and medium term opportunities across the company’s portfolio, from a pricing, promotion, pack size, innovation and claims perspectives.? We then crafted concepts out of different types of highest impact opportunities, to then validate the opportunities through Discrete Choice testing, while providing a perspective on size of prize for each opportunity as well as how well the concept attracted new, high potential segments.? One of the key insights of our engagement was to identify how relevant Non-GMO and Gluten Free claims were in maximizing consumer willingness to pay.? The insight led our partner to immediately be able to make two claims to justify price increments while expanding their user base amid inflation.
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3.????? Expanding into a wider array of offerings within and out of category to further diversify and expand options in a recessionary environment through organic and inorganic growth
As we’ve seen repeatedly, an inflationary and recessionary environment can sometimes provide competitive opportunities that can be capitalized.? As companies confront these challenges, one way to weather the storm is to diversify their product portfolios, particularly if they do not play in the super premium or value spaces, which tend to be less impacted by inflation.? Diversifying the product portfolio can be achieved organically, through innovation and renovation of existing brands into new spaces; or inorganically, where undervalued assets ?become available in the short term and can represent a smart investment into a particular growth platform.
During COVID, at the close ending of the stay at home mandates, we partnered with a leading bread manufacturer to impact their inorganic growth strategy, by identifying key spaces for growth as well as target acquistion companies.? The manufacturer was interested in incremental, smaller acquistioin into high potential spaces that would diversify its portfolio away from just bread and bread substitute offerings.? We first helped the company cement its Where to Play strategy by identifying Agile Innovation growth opportunities in the Snack category, based on growth rankings, actionability, acquisition actionability among other variables; as well as internal fit variables with our client.? This led us to identify key areas for deeper study, top two of which we assessed growth sustainability and identified immediate target acquisition opportunities.?
By conducting this type of growth strategy work, our client partner was able to gain a shortlist of opportunity acquisition companies which helped it stablish a footprint in the Snacking space, beyond the bread and bread substitute area.? Given the war in Ukrain and the pressure that all types of grains are having in terms of cost and distribution chain issues, investing in diversification was a core winning element in the company’s strategy.
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In Conclusion
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As Manufacturers, including Plant-Based Manufacturers, leverage defensive strategies against demand that might shift given higher prices, they need to also put into play offensive strategies that can help capture those who trade up or trade down from other categories.? Anticipating change can help address disruption as well as shifts in the macro-economic environement.
As we embark into a multiple year perior of growing inflation, where volume will be impacted as brands take price, it will be essential to understand:
·??????? How to identify and anticipate opportunities that arise from consumers trading up and trading down from adjacencies, which can generate trial
?·??????? How to safeguard from consumers trading away from our brand(s), to hopefully craft a diverse portfolio that can absorb the change or maximize the effectiveness of our brand positioning and claims in a way that consumers are willing to pay for our offering
Change can be daunting, but at the same time change brings a vast array of opportunities that can be capitalized with foresight.
About the Author
Connie Chang is an SVP, Principal in the Circana Growth Consulting practice and can be reached at [email protected].
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