Shoppers are losing taste for Big Food
Big Food is not designed to survive the next generation in recognizable form. Its business model is obsolete
Big Food appears to be in permanent decline.
The household-name companies that have stocked North America’s pantries for a century — firms such as Kellogg Co., Kraft Heinz Co., General Mills Inc. and Coca-Cola Co. — are coping badly with seismic changes in the retail food industry.
Over the past three years, average sales at North America’s Top 10 processed-food companies have slipped 4.4 per cent. Four of the Top 10 have endured sales drops in the double digits. Big Food has lost more than $20 billion (U.S.) in sales in the past three years as consumer loyalty to national brands has faded. As a result, share value at the top 10 Big Food companies is down a remarkable 24.8 per cent on average from their peak prices.
Big Food is coping badly with a confluence of threats.
Consumer preferences have swung away from Big Food’s venerable brands to “food with benefits,” foods that promote heart and digestive health as well as providing nutrition.
Consumers want “free from” foods — free of added salt and sugar, gluten, preservatives, artificial flavouring and genetically modified ingredients. They want organic and locally sourced farm-fresh food. And they want robust flavour and texture that one finds in ethnic- and regional-themed foods, in contrast with Big Food’s bland offerings.
Geared to mass production, Big Food is incapable of providing these specialized foods. And so, it is bleeding market share to those who can, including thousands of upstart specialty food makers and to grocery chains that gear their private-label offerings to local tastes.
Big Food is also imperiled by a reinvented grocery industry increasingly dominated by a trio of non-traditional grocers: Wal-Mart Stores Inc.; Costco Wholesale Corp.; and the merged Amazon.com Inc. and Whole Foods Market Inc.
Those three firms now account for about 35 per cent of grocery sales. Walmart is America’s biggest grocer.
With their unprecedented volume buying power, those unconventional grocers are squeezing the already thin profit margins of their Big Food suppliers.
More worrisome for Big Food, those relative newcomers each have more resources than Big Food to develop and heavily promote private-label goods. These “house brands” generate more profit for grocers than the na- tional brands from which they’re taking market share.
Finally, grocery stores are being redesigned to display around the periphery of the store goods aimed at health-conscious shoppers — including farm-fresh food, in-store deli products, prepared hot meals and locally sourced specialty foods. Big Food’s flagship brands are relegated to the less frequently visited centre of the store, where they compete with lowerprice house brands.
The forced departure last week of Denise Morrison as CEO of Campbell Soup Co. is instructive of the turmoil in Big Food. Morrison is the 15th CEO to leave a Big Food or major meat processing firm since the start of 2016.
Morrison was determined to reinvent Big Food. She acquired makers of farm-fresh and specialty foods and launched a venture capital fund to finance specialty-food startups. Morrison also won industry plaudits for slashing costs. In January, Campbell Soup said it will close its 87-year-old Toronto factory, with a loss of 380 jobs.
But Morrison’s ambitious makeover failed at Campbell Soup, the fate of similar efforts at Morrison’s peers. Culture clashes between entrepreneurial acquisitions and regimented Big Food firms have resulted in more writedowns than success stories.
A 48-per-cent plunge in Campbell Soup’s stock since its peak forced Morrison’s resignation May 18.
Poor execution on integrating acquisitions figures into Morrison’s fate, to be sure. But her diagnosis of what ails Big Food was spot-on.
There are now about 88 million millennials in North America, whose regard for food is markedly different from that of previous generations. And Big Food’s heritage of mass production doesn’t jibe with the new, complex demographic reality of households that are multicultural, single-parent, samesex and multi-generational.
Growing income inequality has stripped Big Food of its traditional high card of premium prices for goods of perceived highest quality and prestige. “There’s a shrinking middle class in the U.S., a widening chasm between haves and have-nots,” Morrison told the New York Times back in 2015.
Have-nots, who by some measures account for more than one-third of the North American population, cannot splurge $5.23 on a can of Campbell’s Chunky Chicken Noodle Soup. And they needn’t do so, when Walmart offers a passable house-brand knock-off for $2.17.
Big Food is not designed to survive the next generation in recognizable form. Its business model of mass-production for a mass market is obsolete.
Big Food is basically stuck with its legacy brands. For Campbell Soup, that means the tinned soups the company first introduced in 1869, whose sales keep slipping but remain the company’s biggest source of revenue.
Many of the brands on which Big Food relies most heavily are ancient.
Those include Kraft Heinz’s Maxwell House brand and Mondelez International Inc.’s Oreo cookies. Each of those products is 126 years old. Kellogg’s Corn Flakes was launched in 1894. General Mills’ Betty Crocker cake mixes first appeared in 1921. And Coca-Cola dates from 1886, the year the Statue of Liberty was dedicated.
Coca-Cola Co.’s revenues are down an alarming 20 per cent since 2016. And shares in the Kraft Heinz juggernaut have lost almost 40 per cent of their value since the 2015 merger that created it.
A chagrined Warren Buffett, a major investor in Coke and Kraft Heinz, allowed this month that legacy food and beverage brands are losing their investor and consumer appeal. “(Consumers) seem a little more willing to experiment with different diets and food than they were five or 10 years ago,” he told CNBC.
And Big Food remains committed to many brands that are uncool with millennials, including Kool-Aid, Jell-O and Velveeta (Kraft Heinz), Swanson (Campbell Soup) and Tang (Mondelez).
Wall Street won’t be impressed with some of Big Food’s latest “innovations.”
They include a recently unveiled mash-up of Unilever PLC’s Hellmann’s mayonnaise and Heinz ketchup, yielding “Mayochup.” Kellogg’s latest brainwave is to offer Pop Tarts that combine two sugar-laden formulations, Frosted Strawberry and Drizzled Cheesecake.
And Kraft Heinz’s Oscar Mayer brand is launching “Bacoin,” which the company boasts is “the first-ever cryptocurrency backed by the gold standard of Oscar Mayer Bacon.”
Big Food appears determined to tinker with its legacy brands rather than invent food relevant to 21st-century diets.
That is akin to the buggy-whip makers who experimented with hemp and rubber before accepting that the game was up.