Editor’s Note: This “A Balancing Act” story is the 18th in a series for Food Dive, where experts examine trends uncovered in earnings reports and discuss strategies that impact the balance sheet. Previous articles in this series can be found here.
As industry consolidation and competitive pressures mount, top line growth has softened across the food and beverage space. And while nimble upstarts have been able to successfully adapt to changing consumer values and purchasing behavior, many slow-moving legacy CPGs have been caught flat-footed.
“Big food companies have collectively lost billions of dollars in sales, and not only that, they are struggling at an almost flat growth [rate] of around 1% to 2%, whereas smaller and medium-sized companies are growing at a double-digit pace,” Lou Biscotti, partner and head of the food and beverage practice at Mazars USA LLP, told Food Dive.
In order to recapture market share and return to growth, these legacy incumbents must face difficult questions: Which growth strategies are best for their companies, and what are the risks that come with each tactic?
According to Zach Grannis, institutional business manager at CircleUp, there are a number of solutions companies can consider.
“Big food companies have collectively lost billions of dollars in sales, and not only that, they are struggling at an almost flat growth [rate] of around 1% to 2%, whereas smaller and medium-sized companies are growing at a double-digit pace."
Partner and head of food and beverage practice, Mazars USA
“You see strategics placing a few different bets… whether that be to reinvigorate existing brands, acquire growth through full-blown acquisitions, or form corporate venture capital arms to partner with brands much earlier than would happen in an actual acquisition,” Grannis said. “All of those [strategies] could be successful means of returning to growth in those categories.”
Still, matching a problematic product, brand or marketing campaign with a viable solution is only the first step on the path to growth. In order to achieve long-term stability in a volatile marketplace, analysts agree that Big Food companies must also change their business perspective — a proposition that’s easier said than done.
Industry blind spots
Biscotti said that historically, Big Food’s struggles have stemmed from the fact that large companies try to approach both their smaller, premium brands and better-known legacy brands the same way.
“[Big Food] uses the same processes, the same distribution channels, the same everything regardless of the type of product because that’s their process,” Biscotti said. “And while that’s good in some cases, it’s very bad in others because [companies] don’t take the time to really look at emerging brands and new trends.”
Grannis agreed that too strong a focus on existing success could be blinding companies to lucrative opportunities.
“When you see these large CPG companies losing market share, it’s effectively because they’re good at managing their current business, and because they’re so good at managing their current business lines, it prohibits them from being able to take part in the growth that’s occurring at the early stage,” he said.
"When you see these large CPG companies losing market share, it's effectively because they're good at managing their current business, and ... it prohibits them from being able to take part in the growth that's occurring at the early stage."
Institutional business manager, CircleUp
Grannis also said that pressure to meet investor expectations can discourage CPGs from taking innovative risks — which, in some cases, may be necessary to revive sales.
“For a large consumer packaged goods company, the reality is that most of them are public entities, and with that comes the responsibility to deliver shareholder value… and meet quarterly savings and earnings goals,” he said.
He explained that it can be difficult for brands to make bets on new brand development or product formation because those investments can detract from “why those investors invested in them in the first place, and where… sales and profitability come from,” making it challenging to justify new investments.
Innovating beyond new product formulas
Still, in-house innovations, when developed with a savvy, comprehensive branding vision, can perk up category sales, Erin Lash, director of consumer equity research at MorningStar, said.
“Product innovation… comes down to having a pulse and a sense of what consumers are looking for,” Lash said. “It could be as simple as updating packaging sizes [or] making sure that products are positioned in the right spot of the store.”
Lash explained that many companies miss out on potential innovation opportunities because they take too narrow views of their competitors.
“Campbell’s Soup doesn’t just compete against other soup manufacturers, and General Mills and Kellogg don’t just compete against Post and private label cereal,” she said. “There are other alternatives that consumers have, and those could even be extending beyond the grocery store.”
She also argued that without leveraging insights about competitors’ strategies and developing effective marketing strategies, product innovations won’t be enough to prop up top line growth.
“Even value-added new products fail if consumers don’t know about them,” she said. “The shelf is crowded, whether we’re talking about the shelf in a physical store or online, so making sure that you’re marketing these new products and the benefits they offer is key.”
Grannis cautioned that significant risks can come with changes to product formulas.
“The challenge that we see is preserving the existing relationship that you have and the loyalty you have from the consumer base that you’re serving,” he said. “If you deviate so far that you alienate the consumers, that’s the worst of both worlds — you’re not coming across as authentic to the new consumers, and you’re actually losing that hard-core enthusiast that is your mainstay today.”
Still, he said that he has seen select situations where CPGs have successfully reinvigorated existing brands.
"For example, Nestle’s foray into more exotic flavors around their Kit Kat products did very well — the matcha SKU is one that has really taken off,” he said.
“Even value-added new products fail if consumers don’t know about them. The shelf is crowded, whether we’re talking about the shelf in a physical store or online, so making sure that you’re marketing these new products and the benefits they offer is key.”
Director of consumer equity research, MorningStar
He also pointed to Nestle’s development of Natural Bliss, a health-focused alternative to its Coffee Mate coffee creamer, as an example of product development gone right.
“Coffee Mate is a staple product that has ingredients that are, I would say, out of favor with younger demographics… and Natural Bliss tries to capitalize on what in those products doesn’t resonate with that younger demographic — or candidly, a consumer who wants to be healthier,” Grannis said. “I think that this product has done well because it’s a separate brand name — it’s not ‘Coffee Mate Light' or 'Coffee Mate for Millennials.’ It’s Natural Bliss.”
Lash warned, however, that just as companies can underutilize a product’s potential reach, brands can be stretched too thin across categories.
“When Kellogg acquired Kashi, initially they had done a very good job of leveraging that base, but at some point several years ago, they extended it too far into more traditional distribution channels and product categories,” she said. “That took away some of the entrepreneurial aspect of the brand… took away some of the cache and alienated that core consumer.”
Capturing new demographics
Small product spinoffs like Nestle’s Natural Bliss can be a relatively low-risk way to capture high-value consumer demographics, such as the millennial shopper.
Grannis said that companies should do a deep-dive of their consumer data in order to evaluate the behavior of their strongest consumer base and look for opportunities to capture a new kind of consumer.
“Large consumer businesses have access to some of the most interesting proprietary data that they’re sitting on and may not be leveraging,” he said. “[CPGs] should see what they can glean from that information and those insights… to help inform where [they are] allocating capital, resources and marketing investment.”
He said that it’s especially important for companies to be data-driven when it comes to millennial consumers because they are “such an important driver of household spending going forward” and can preserve the longevity of business.
“Large consumer businesses have access to some of the most interesting proprietary data that they’re sitting on and may not be leveraging."
Institutional business manager, CircleUp
Biscotti suggested that targeted social media campaigns could be another way to boost brand awareness and lure this shopper base to new or existing products, which could strengthen sales.
“Social media is very powerful, and companies need to take advantage of that with Facebook and Twitter and all of the other vehicles out there because millennials and younger generations really utilize that information… and online ordering is increasing at a tremendous pace,” Biscotti said.
Kira McCroden, PR at CircleUp, said that these strategies only benefit brands that are able to convey a sense of authenticity through their campaigns and around their new product channels.
“Sometimes big brands try to dip their toe in the millennial category and it can look a little forced, like your parent is trying to be cool,” she said. “A lot of brands have been called out for that… so there needs to be consideration of how much authenticity you will be exuding with a [certain strategy], or if you look like you’re playing catch-up.”
M&A may still be the magic ingredient
Despite the benefits that can be gained through analytics analysis, revamped marketing campaigns and in-house product launches, Grannis, Biscotti and Lash agreed that M&A is likely the safest way for large CPG companies to bolster top line performance.
“It’s very tough to develop a new product — 80% of new products fail,” Biscotti said. “I think it’s better for [companies] to acquire a small, innovative company and then launch a new product from there.”
There are benefits to be gained beyond access to on-trend products and innovative entrepreneurs when it comes to small brand acquisitions, Lash said.
“Even if these acquisitions aren’t necessarily material enough to bolster top-line performance, I think that there is opportunity in the insights that can be gained [from small operators] in terms of greasing the wheels of their innovation cycle,” she said. “If you look at [CPG] companies right now, the length of time that it takes to get a product from concept tends to be significantly longer than than the time a consumer trend is constant.”
By bringing nimble, niche startups under their umbrellas, Lash argues that Big Food can learn strategies that can benefit underlying business and eventually lead to steady, healthy top-line improvement.
Grannis said that when properly matched, legacy brands and upstarts can capture stronger growth together than they could individually.
“[Big players] have very efficient supply chains and R&D capabilities, and when they’re matched with the authentic innovation and ideas that come out of the early stage… some very interesting stories can come out of that,” Grannis said.
“Even if these acquisitions aren’t necessarily material enough to bolster top-line performance, I think that there is opportunity in the insights that can be gained [from small operators] in terms of greasing the wheels of their innovation cycle."
Director of consumer equity research, MorningStar
When asked to give an example of what this relationship looks like in the food space, both Lash and Grannis pointed to General Mills’ acquisition of Annie’s.
“[Annie’s] contributes 7% of General Mills’ revenue overall, and that’s a significant share, but it’s also responsible for 50% of its growth… which is contributing to the business in a lot of ways,” Grannis said.
Lash said that the Annie’s acquisition was successful because of General Mills’ concerted effort to keep the brand separate from the rest of the organization, allowing the smaller brand to maintain its entrepreneurial spirit in terms of product development.
“But [General Mills] also leveraged its distribution channels to expand [Annie's] reach as much as possible while also expanding Annie’s line up into other categories or segments that General Mills already understands well,” Lash said. “For instance, Annie’s has gotten into yogurt and cereal and a handful of other categories.”
Grannis said striking a balance between preserving the culture of a small brand while simultaneously adding value to its products can be a tall order, but one that companies need to strive for in order to secure long-term top-line growth.
“It’s important to identify what gave the brand success so far and what will continue to drive growth and what’s resonating with the consumer,” Grannis said. “I think this should be a case study for many other industry participants for how this is done extremely well."
The "A Balancing Act" series is brought to you by BMO Harris Bank, a leader in commercial banking. To learn more about their Food & Beverage expertise, visit their website here. BMO Harris Bank has no influence over Food Dive's coverage.