Big firms were slow to address threats of fresher fare, low-cost
knockoffs
By Annie Gasparro and Saabira Chaudhuri
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (July 7, 2017).
Big Food is in big trouble.
For over a century, brands such as Kellogg's cereal, Campbell's
soup and Aunt Jemima pancake mix filled pantries of American
households that wanted safe, affordable and convenient food. They
provided companies with reliable revenue growth from grocery
shelves, and there was little reason to mess with that formula.
Today, these giants are struggling with competition that is
corroding business from both ends. High-end consumers are shifting
toward fresher items with fewer processed ingredients while
cost-conscious shoppers are buying inexpensive store brands. The
makers of staples including Chef Boyardee canned pasta and
Hamburger Helper meal kits failed to spot the threat and didn't
innovate in time.
Anyone searching for macaroni and cheese, a childhood staple,
can opt for fancy pasta with organic ingredients or inexpensive
store brands such as Kroger Co.'s. Squeezed in the middle are Kraft
Heinz Co.'s venerable blue-and-yellow boxes.
The pressure has set off a bout of soul searching in the
industry as well as some dramatic restructuring. Some companies are
shedding underperforming brands, others have contemplated mergers.
Nestlé SA, which said in June it was looking to sell its U.S.
confectionery business, is now the target of an activist
investor.
Younger companies such as Chobani, the Greek-yogurt maker, have
taken market share from giants such as General Mills Inc., which
came out with Greek-style Yoplait yogurt, but too late to catch up.
"We were late to respond as Greek yogurt developed early in this
decade," said General Mills Chief Executive Jeff Harmening, noting
double-digit declines in Yoplait sales lately. "Our sales have
suffered as a result."
The plight of the packaged-goods companies is a classic business
tale. An industry creates winning products, carves out strong
market positions and enjoys reliable, sustained revenue -- only to
be too slow to adapt to changes that threaten those cash cows.
"A lot of what's crept into big companies is internal focus,
bureaucracy, PowerPoint presentations -- the antithesis of
agility," said Sean Connolly, chief executive of Conagra Brands
Inc., maker of Hunt's ketchup, Peter Pan peanut butter and Chef
Boyardee. Mr. Connolly joined Conagra in 2015 and said he is trying
to shake this mentality and move faster at coming out with new
products.
Many big brands didn't move fast enough to remove artificial
ingredients and haven't been able to shed the negative perception
of processed food, said several food executives and others close to
the industry.
At the same time, they faced low-cost store brands -- or
"private label" products -- from retailers such as Costco Wholesale
Corp., Wal-Mart Stores Inc. and regional grocers that sell copycat
products. National brands, which have huge marketing costs,
generally can't afford to compete on price with the in-house brands
of stores, which need little marketing beyond displaying products
prominently on their own shelves.
Store brands gained popularity around the financial crisis, and
analysts expect their market share to rise as they add natural
brands of their own and as discount chains, which mostly sell store
brands, expand.
Private-label-product shelf space has expanded 3.5% a year since
2012, estimated Credit Suisse analyst Robert Moskow in a recent
report. Big brands face escalating price pressure from the
incursion of store brands and from retailers demanding lower
prices, he wrote. "Up to now, the Big Food companies had sufficient
pricing power to drive earnings higher even though they had been
losing market share to smaller entrepreneurial organic and natural
brands."
Big food sellers still dominate in America. The 25 largest food
and beverage companies commanded a 63% share of $495 billion in
U.S. food and beverage sales in 2016, according to consultancy A.T.
Kearney.
That is down from 66% in 2012, and even seemingly small
market-share losses hurt sales and profits. The top 25 companies
averaged 2% annual sales growth from 2012 through 2016, compared
with 6% for their smaller rivals, according to A.T. Kearney.
Food companies in recent years have revamped old-line brands to
cater to evolving consumer preferences. Nestlé cut sugar in its
Nesquik chocolate-drink mix and fat in frozen dinners. General
Mills removed artificial food dyes from its Trix cereal. Kraft
Heinz has scrapped added nitrates from its Oscar Mayer hot dogs and
removed artificial dyes from its macaroni and cheese, to meet
consumers' "changing needs through product renovations," a
spokeswoman said.
Big companies also say they are trying to better compete with
inexpensive store brands by ensuring their food tastes better and
can promise health benefits that make them worth the extra
money.
The moves are coming late for consumers such as Megan Dart, a
37-year-old mother of four in the Houston area who says she grew up
on General Mills' Hamburger Helper and Kraft's Kool-Aid but now
prefers fresher food for her children.
"Velveeta. I don't even know what that is," she said, adding
that the ingredients in that Kraft cheese don't seem "real" to her.
Instead, she buys a block of cheese made by an Oregon dairy
cooperative. "We don't do pre-made meals, no microwave meals."
When she does buy packaged food such as frozen waffles, she
turns to her local grocery-store brand as long as it tastes as
good. "If I'm going to buy it," she said, "I would rather save the
money."
Through most of the 1900s, big brands were in tune with
Americans' desire for safe and affordable food. Innovations such as
flash-freezing made packaged food convenient. Preservatives and
artificial coloring made it appealing and cheap, without risk of
food-borne illness. Packaged foods enjoyed prime shelf space at
grocery stores and won over consumers with national
advertising.
"Back then," said food historian Andrew Smith, "they could
advertise and promote their way out of a problem."
In the 1990s, changing perceptions of what counted as healthy
spurred consumers toward more natural, organic food, Mr. Smith
said. U.S. regulators began requiring nutrition labels on packaged
food, leading to more scrutiny by customers.
When the push for fewer artificial ingredients and additives
gained momentum, big food companies largely decided to wait and see
whether it would become mainstream, he said. "They ignored the
concerns, and they stopped experimenting because they could buy
aisles in the grocery store."
From 2005 to 2010, a swath of new brands such as Amplify Snack
Brands Inc.'s SkinnyPop popcorn and Kind LLC's Kind snack bars hit
shelves, rapidly expanding from a few small stores to retail giants
such as Costco and Wal-Mart.
Smaller brands were more focused on making food with simpler,
more natural ingredients, said Chris Morley, president of food and
retail research at market-research firm Nielsen. Such "clean-label"
products, he said, have been the biggest growth drivers of the
packaged-food and beverage industry in the past five years.
Some old standbys haven't fared as well. Hamburger Helper, and
the other Helper varieties owned by General Mills, declined to 40%
of sales of dinner mixes in the U.S. last year from 61% in 2007,
according to market researcher Euromonitor, and Conagra Brands's
Chef Boyardee's share of shelf-stable ready-meal sales fell to 23%
from 25%.
General Mills said Hamburger Helper might not have robust growth
prospects but generates consistent profits and feeds millions of
Americans. It improved the taste by using real cheese and, to
attract value-oriented shoppers, has added 20% more pasta, a
spokeswoman said.
Conagra said it is focused on reviving brands with the most
potential, such as Healthy Choice frozen dinners. It said it would
sell brands that aren't core to the business, such as Wesson
cooking oil, and it has acquired trendy brands such as Frontera
salsa. Frozen dinners by Frontera hit shelves within 120 days of
creating the recipe, much faster than the typical two-year
innovation cycle, a Conagra spokesman said.
The web and social media gave smaller food companies a direct
path to consumers' hearts, minds and stomachs. They gained traction
through blogs and Facebook with little marketing spending, selling
food online via Amazon.com Inc. or their own websites long before
they would have been able to get it in stores.
Among American households, 23% bought groceries online last
year, up from 19% in 2014, according to Nielsen and the Food
Marketing Institute.
Big brands can no longer control perceptions about food with
television advertisements and shelf placement. "In the good old
days, the retail shelf was an important barrier to entry," said
Nestlé CEO Mark Schneider at a Berlin conference in June. Today,
the "endless shelf" of the internet means smaller companies can
easily enter the market, he said.
Big food companies say they have also been hurt by economic
trends in the U.S. that have slowed some consumer spending in
recent years.
The inertia of big food firms made it easier for them to lose
market share when eating trends changed, said Beth Goeddel, who
spent 16 years in marketing for Kraft brands such as Oscar Mayer
before it was acquired in 2015. "It's easier to be nimble when
you're smaller, and you have nothing to lose," said Ms. Goeddel.
She now works for an artisanal chocolate company.
Macaroni and cheese is a case in point. Kraft's version made its
debut in 1937 when America was in the throes of the Great
Depression and was popularized for its ability to serve a family of
four for 19 cents, the company said.
When people started looking for fresher options in the new
millennium, brands like Annie's Homegrown all-natural pasta gained
at the expense of mainstream brands. From 2012 to 2016, Kraft lost
2 percentage points of market share in mac and cheese, according to
Euromonitor.
Kraft Heinz said that since it announced last year it had
removed artificial dyes, sales and market share improved.
Unilever PLC is trying to sell its margarine brands -- the
foundation on which it built its business starting in 1929 -- after
a takeover offer from Kraft Heinz sparked a strategic overhaul
earlier this year. Over the past decade, butter regained favor as a
natural option and margarine sales fell. Unilever recently kicked
off a restructuring program aimed at making it more responsive to
consumer trends.
Nestlé, the world's biggest packaged-food company, was singled
out by billionaire activist investor Daniel Loeb for having fallen
behind "due to changes in consumer tastes and shopping habits, as
well as an influx of new competition from smaller, local
brands."
Nestlé had said in June it was looking to sell its U.S.
confectionery business, which includes the Butterfinger, Baby Ruth
and Crunch candy bars. Last week, following Mr. Loeb's letter, it
added that it would invest in high-growth businesses such as
bottled water and infant nutrition instead.
Mondelez International Inc., which has mostly snack brands, and
chocolate giant Hershey Co. say they have benefited from an
increase in people snacking rather than having three meals a
day.
Companies, while adjusting some big brands to new realities, are
adding new lines as well. General Mills, after it failed to regain
ground lost to Chobani, recently launched a French-style line of
yogurt.
Several big companies are acquiring faster-growing brands.
Campbell Soup Co. said Thursday it plans to buy Oregon-based
Pacific Foods, an organic soup and healthy-meal company, for $700
million. Campbell CEO Denise Morrison said she has been focused on
responding to consumer demands for fresher ingredients since 2011.
"This accelerates our efforts," she said.
In 2014, General Mills bought Annie's Inc., maker of Annie's
Homegrown, and expanded it to new products such as yogurt and soup.
In 2016, Danone SA, the giant yogurt company, agreed to buy
WhiteWave Foods Co., which makes Silk soy milk and Horizon organic
yogurt, saying the deal would help it offer consumers healthier
choices.
Kellogg Co., General Mills and others have directly invested in
food startups through venture-capital funds that they say will give
them insight as to how to respond better to evolving trends.
"Size alone," said Nestlé's Mr. Schneider at the conference,
"does not protect you from the winds of change."
(END) Dow Jones Newswires
July 07, 2017 02:47 ET (06:47 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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