Food pack­agers brace for on­line price squeeze

Northwest Arkansas Democrat-Gazette - - BUSINESS & FARM - CRAIG GIAMMONA BLOOMBERG NEWS

Wall Street is bet­ting that Ama­zon.com Inc.’s push into gro­ceries will be very bad news for the pack­aged-food in­dus­try.

It’s up to the likes of Mon­delez In­ter­na­tional Inc. to prove that no­tion wrong.

The snack gi­ant, which makes ev­ery­thing from Oreos and Tang to Tri­dent gum, has been sell­ing more prod­ucts over the In­ter­net and re­tool­ing its sup­ply chain for a dig­i­tal world, said Jeff Jar­rett, Mon­delez’s e-com­merce chief. The idea is to show that it can shift busi­ness on­line with­out get­ting crushed by Ama­zon, which is famous for squeez­ing sup­pli­ers’ mar­gins.

But it may be fac­ing an up­hill fight. After Ama­zon agreed to buy Whole Foods Mar­ket Inc. in June for $13.7 bil­lion, food pro­duc­ers saw their shares tum­ble. Few an­a­lysts are pre­dict­ing a rally any­time soon.

Ama­zon is ex­pected to trans­form gro­cery shop­ping into an in­dus­try where brands have less sway over con­sumers and prices are lower. That has put pres­sure on Mon­delez and oth­ers to build their own di­rect re­la­tion­ships with cus­tomers, help­ing pre­serve their in­flu­ence.

“You’ll con­tinue to see big brands fo­cus on the on­line chan­nel like never be­fore,” Jar­rett said in an in­ter­view.

Ama­zon hasn’t said much publicly about its plans for Whole Foods, but the com­pany is ex­pected to lower prices at the ex­pen­sive chain. Most an­a­lysts agree that Jeff Be­zos’s busi­ness will play tough with sup­pli­ers.

While Ama­zon’s gro­cery am­bi­tions were well-es­tab­lished be­fore the Whole Foods deal was an­nounced, only about 2 per­cent of the food busi­ness has moved on­line. The prospect of the Seat­tle-based com­pany tak­ing over an up­scale gro­cer was seen as the lat­est piece of bad news for the group of com­pa­nies known as Big Food.

The day the Whole Foods ac­qui­si­tion was an­nounced, 10 of the largest food com­pa­nies in the U.S., in­clud­ing Kraft Heinz Co., Gen­eral Mills Inc., Mon­delez and Camp­bell Soup Co., lost al­most $8 bil­lion in mar­ket value com­bined.

Food pro­duc­ers were al­ready get­ting squeezed by Wal-Mart Stores Inc., where gro­ceries ac­count for more than half of rev­enue. Ama­zon’s push into the busi­ness will put food at the cen­ter of a re­tail bat­tle be­tween the two com­pa­nies, hurt­ing ven­dors in the process, ac­cord­ing to Bloomberg In­tel­li­gence an­a­lyst Michael Halen.

“There’s no doubt they’re go­ing to pres­sure the pack­aged-foods guys on prices,”

he said.

Com­pa­nies across the in­dus­try are pre­par­ing for the change. Camp­bell re­cently hired an Ama­zon veteran to run a newly cre­ated e-com­merce unit. And at Gen­eral Mills, which sells Chee­rios and Betty Crocker, Chief Ex­ec­u­tive Of­fi­cer Jeff Har­mening is gird­ing for bat­tle.

“We’ve been do­ing this for 150 years,” Har­mening, a com­pany veteran who took over as CEO in June, said in an in­ter­view. “Will there be com­pe­ti­tion? Of course. It’s just on­line now.”

But adapt­ing won’t be easy. After decades of cater­ing to gro­cery stores, the com­pa­nies are try­ing to fig­ure how to pro­duce,

pack­age and ship their food in a way that works for Ama­zon and Wal­mart.com.

Mon­delez wants to gen­er­ate at least $1 bil­lion in on­line rev­enue by 2020. That’s a tiny frac­tion of its roughly $26 bil­lion in sales, but a fast-grow­ing piece. The Deer­field, Ill.-based com­pany is now about a third of the way to that goal after a 35 per­cent jump last year, Jar­rett said.

Key to its early ef­forts was a hol­i­day e-com­merce test. The com­pany sold lim­ited-edi­tion boxes of Oreos di­rectly to con­sumers for $19.99 in the weeks be­fore Christ­mas last year — a move that re­quired Mon­delez to up­grade its sup­ply chain.

But it’s not avoid­ing Ama­zon. The com­pany has in­creas­ingly re­lied on the site since 2015, when it first set the 2020 rev­enue goal. In all, about 90

per­cent of Mon­delez’s as­sort­ment is avail­able on­line.

“It’s all about mak­ing food on­line much more eco­nom­i­cal than it ever was be­fore,” Jar­rett said. “It’s a great ex­am­ple of in­no­va­tion forc­ing us to adapt.”

The largest food and bev­er­age com­pa­nies have lost roughly $20 bil­lion in re­tail sales since 2011, ac­cord­ing to Robert Moskow, an an­a­lyst at Credit Suisse Group AG. Gen­eral Mills and Kel­logg are each look­ing at a fourth straight year of rev­enue de­clines. Camp­bell is in a three­year slump, and Kraft Heinz hasn’t posted a sin­gle quar­ter of rev­enue growth since the com­pany was cre­ated in a 2015 merger.

Where have all those lost sales gone? Up­start brands, restau­rants and meal-kit ser­vices have taken some mar­ket

share, but of­ten con­sumers are just pay­ing lower prices, mak­ing it harder for the big food com­pa­nies to main­tain growth.

Su­per­mar­ket brands also con­tinue to make in­roads. Even­tu­ally, Ama­zon is ex­pected to push hard into its own pri­vate-la­bel fare, which is of­ten more prof­itable to sell.

“There’s a shift in trust to the re­tailer brands,” said Mikey Vu, a gro­cery ex­pert at Bain & Co. “That has to scare the heck out of the na­tional brands.”

At Gen­eral Mills, Har­mening ar­gues that well­known brands tend to thrive on­line. That’s be­cause con­sumers gen­er­ally shop for things they al­ready know.

To an­a­lysts and ob­servers, the cheery rhetoric sounds a lot like what book­stores and

ap­parel com­pa­nies said in years past — be­fore Ama­zon wreaked havoc on their busi­ness. That’s the view of Neil Ack­er­man, a for­mer Ama­zon and Mon­delez sup­ply-chain ex­ec­u­tive who now works for John­son & John­son.

For now, Big Food com­pa­nies face a Catch-22: They have to sell their prod­ucts on Ama­zon, but that could lead to prob­lems down the road, he said.

“If Ama­zon con­trols the en­tire sup­ply chain, it’s a huge threat — that’s what this is about,” Ack­er­man said. “It hap­pened with books and ap­parel and sport­ing goods, and you’re watch­ing it hap­pen again.”

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