A Balancing Act: How frozen food manufacturers are bouncing back from lost market share
Editor's note: "A Balancing Act" is a series for Food Dive, where experts examine trends uncovered in earnings reports and discuss strategies that impact the balance sheet. You can read the first piece in the series here, and the second here.
Waning consumer interest in frozen food is nowhere more evident than in the last three years of lost unit sales, from a nearly 1% decline in 2013 to almost 3% in 2015. By contrast, organic food sales in the U.S. rose 11% last year to hit a record $39.7 billion, according to the Organic Trade Association.
"There's been a lot of activity in the natural and organic foods space as the shift in the palate of consumers has been moving away from processed frozen foods toward more organic, better-for-you type foods," said Anthony Valentino, deputy editor at Mergermarket.
The frozen segment is crowded. Some brands are in need of better positioning, and more companies could see more meal-time budgets being spent on at-home-delivery kits.
While a variety of frozen food categories are struggling, promising earnings reports for brands from companies like Nestle (Lean Cuisine), Pinnacle Foods (Birds Eye, Gardein), and B&G Foods (Green Giant) demonstrate the opportunity for a comeback within this segment. These brands have tapped innovations in ingredients, flavors, and packaging with a focus on today's definition of health. They've then driven that focus home with marketing messages that distinguish the newer offerings from former perceptions of frozen foods — and their brands.
Last month, Food Dive took a look at categories losing the most market share based on analysts’ perspectives. But after consulting recent Nielsen data, the makeup of those categories changed, illustrating another handful of product segments that face unique challenges, including a perceived lack of convenience and a dated attitude toward what "healthy" means to consumers today. Many of them fall under the umbrella of frozen foods.
Food Dive takes another look at what manufacturers are doing to turn around plunging sales and wavering consumer sentiment after notable market share losses.
Frozen food sub-segment sales get iced
According to Nielsen data for categories with more than $10 million in sales in the 52 weeks ending April 2, among the categories with the largest declines in either dollar or unit sales (or both) were:
- Frozen poultry (-16.9% dollar sales/-12.7% unit sales)
- Frozen soup chili stew (-15.2%/-21.0%)
- Frozen bagels (-13.7%/-16.6%)
- Frozen meal starters (-7.9%/-22.0%)
- Frozen pizza crust (-0.7%/-17.9%)
With a $10 million sales minimum, frozen foods accounted for four categories on the list of 10 largest category declines by dollar sales (three in the top five). Five frozen food segments made the list by unit sales (four in the top five).
According to an August 2015 New York Times report, Nielsen data showed a 2% decline in unit sales for frozen foods in the U.S. in the past four years, while sales grew by less than 1% on average in that time. However, when looking at category sales worldwide, a more recent report predicted the global frozen foods industry will grow at a CAGR of 4.1% to an estimated total of $306 billion in sales by 2020.
Frozen food manufacturers have work to do in the U.S., where perceptions of health negate diet foods and demand for convenience has caused frozen foods to fall behind RTE meals and snacks. But frozen foods haven't lost their global appeal, so looking toward what works in international markets and bringing those insights back to the U.S. could provide much-needed solutions for the category.
Spotlight: Nestle's Lean Cuisine
Brands like Nestle's Lean Cuisine had particularly felt the drag in sales, having reported a 20% revenue drop in the two years leading up to June 2015. Lean Cuisine has since gone through a major brand overhaul to focus less on making "diet"-friendly foods and more on organic, high-protein, and gluten-free meals.
This included new categorization into five sub-segments — Market Place, Craveables, Comfort, Favorites, and Mornings — and updated packaging, merchandising, and marketing strategies that more closely aligned Lean Cuisine as a health and lifestyle brand rather than a "diet" brand.
The overhaul appears to be working. Earlier this month, Julie Lehman, marketing director for Lean Cuisine, told brandchannel, "Consumers have really responded to the repositioning." Sales for the brand jumped by almost 7% year-to-date as of mid-May, according to Nielsen data.
Lehman told brandchannel that despite a sales turnaround, regulations have put constraints on formulations for the brand due to its own name, particularly the term "lean." The brand's name restricts its ability to capitalize on the buzz surrounding fat, a crucial flavor and texture ingredient that may be a healthier nutrient than previously thought. That's according to more recent research, including findings from a 40-year-old study unearthed earlier this year.
"The hardest challenge for us is that sometimes we'd like to include a little more in our foods but we're limited by the amount of fat we can include," Lehman said, referring to regulatory requirements for the term "lean."
Looking ahead: Lean Cuisine will continue to battle the limitations of its own name in terms of the fat-containing ingredients it can use to better align itself with today's perception of health. However, as obesity rates continue to rise, Lean Cuisine can still capitalize on its name to promote its products as a solution to both obesity (Read: not "diet") and general health.
Spotlight: Pinnacle Foods' Birds Eye and Gardein
Pinnacle Foods has profited from its Birds Eye Frozen segment, which recently reported a 3.8% boost in first-quarter sales, the company's best-performing unit that quarter. Shareholders were also pleased with Birds Eye's increased sales and profits, especially when Pinnacle paid out a quarterly cash dividend of $0.85 per share along with the news.
The frozen plant-based meat alternatives brand Gardein, also included in the Birds Eye Frozen segment, has been a strong performer, contributing a 6.2% sales increase in Q3 2015 and 3.6% in Q4 2015. Pinnacle completed the brand’s production expansion earlier this year. Gardein enables Pinnacle to align its frozen foods segment with fast-growing plant-based proteins in addition to frozen vegetables and sides offered by Birds Eye. This portfolio diversity strengthens Pinnacle's presence on the frozen foods aisle and may offer cross-brand benefits if strategic marketing initiatives come into play.
That alignment with health trends is key for frozen food producers to change consumers' perception of the category. Several frozen food brands have turned toward natural, better-for-you, and organic options to revitalize the category, including Birds Eye.
Last year, the brand introduced two new better-for-you platforms: Birds Eye Flavor Full, which pairs vegetables with bold flavors like buffalo and wasabi, and Birds Eye Protein Blends, which are side dishes that combine vegetables, legumes, and whole grains. Gamgort said early on, during a July 2015 earnings call, that acceptance of the platforms by retailers and consumers was "encouraging." He also said the new platforms were "bringing new users, including millennials, to both the category and Birds Eye."
With this kind of segment performance, frozen foods may be a key growth tool for new CEO Mark A. Clouse, former Mondelez chief commercial officer. Clouse replaced Gamgort last month when Gamgort left to become the new CEO of Keurig.
Looking ahead: At Mondelez, Clouse was responsible for the company's growth strategy, which includes expansions of better-for-you products and e-commerce initiatives. These could be targets for Pinnacle too as the company identifies new ways to connect consumers with frozen foods.
Spotlight: B&G Foods' Green Giant
B&G Foods intends to challenge Birds Eye's dominance in frozen foods with the Green Giant brand, which B&G acquired from General Mills last year, announced in September and completed in November. Under General Mills' ownership, Green Giant dwindled in distribution, to the benefit of Pinnacle and Birds Eye. But B&G plans to "fight back" to regain Green Giant's lost market share, B&G Foods president and CEO Robert Cantwell said recently.
Green Giant has already been a contributor to massive growth for B&G Foods since its acquisition. In the latest quarter, B&G reported a 70% surge in net income and 63% jump in net sales to $353 million. However, executives anticipated a larger contribution from Green Giant, which delivered lower-than-expected volumes.
But B&G has a plan. During his conference presentation, Cantwell hinted at innovations being developed under the Green Giant banner, which could launch as early as August. He didn't elaborate, but described the products as "not just me-too innovation" and "platforms of products that nobody else is selling in a different way to eat vegetables today."
B&G is pairing that innovation with a substantial increase in marketing spend for the brand to $32 million, doubling the $15 million to $16 million investment General Mills previously made in the brand. In the near term, marketing efforts include a summer campaign described internally as "awakening the Giant," Cantwell said, followed by a still bigger launch in the fall.
Cantwell noted that this kind of marketing push may go beyond serving Green Giant's interests and benefit the frozen vegetables category as a whole by driving foot traffic to that area of the store. A category boost would also serve B&G on a larger scale, as the company indicated at a conference in January that it was considering more acquisitions in the frozen food sector.
Looking forward: B&G seems confident that its innovations will be transformative for how consumers eat vegetables. Positioning the Green Giant brand with that type of innovation will be key to changing consumers' perceptions of a legacy brand that has been stagnant in recent years.
As positive as these brands' turnarounds may be, challenges remain for the frozen foods industry as a whole:
- Convenience. Packaging innovations, such as a variety of serving sizes or materials that speed up cooking time, could help frozen foods better compete with shelf-stable RTE meals and snacks.
- Seen as "economical." Frozen foods, such as frozen juice, tend to be considered "economy categories," said Eric Penicka, U.S. research analyst specializing drinks and tobacco industry at Euromonitor. "They do well during recessions when people have to pull back their spending. But they’re also a little extra work. ... When the economy improves, people have more money, so they don’t want to buy something that’s an economy product or something which they have to put more work into."
- Emerging ingredients. As alternative proteins and new varieties of produce become more popular, consumers will expect to see them in frozen foods too. But these ingredients have to withstand being frozen and reheated while still offering optimal flavor, texture, and nutritional benefits. This will be a challenge for frozen food brands trying to stay relevant and on top of the latest ingredient trends.
- E-commerce adoption. Shelf-stable products can ship in traditional boxes, but for frozen foods to adopt e-commerce strategies, they require different packaging and refrigerated delivery systems, R&D investments would also be needed to examine how "freeze-thaw" scenarios impact products while they are being shipped in certain climates, according to Don Schaffner, IFT Science Communicator for Institute of Food Technologists. E-commerce food sales are rising, but frozen foods may miss out on these sales if R&D and shipping costs can't be properly managed.
The frozen foods segment, and many of its sub-segments, have to identify the right trends to align with. If not, they risk wasting time and financial investments on lackluster innovations that don't resonate with consumers in a way that promotes the specific benefits of frozen foods over other center-store packaged goods.
As these manufacturers cope with label changes required by the new Nutrition Facts panel update, now is the best opportunity to revisit ingredients, recipes, packaging, and marketing strategies to meet the needs of today's consumers in the most profitable way.
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.