• Big Food’s Struggles to Stay on Top of the Food Industry

Big Food’s Struggles to Stay on Top of the Food Industry

Gone are the days when grocery shoppers place their complete trust in major food companies and a red flag has been raised for the latter. In May 2015, Fortune Magazine ran a special cover story titled “The War on Big Food”, shedding light on the immense challenges facing legacy brands. Credit Suisse analyst Robert Moskow found that the top 25 US food and beverage companies have lost an equivalent of US$18 billion in market share since 2009. Moskow adds, “I would think of them [big food companies] like melting icebergs. Every year they become a little less relevant.”

Large, long-established food companies have been losing consumers mainly because consumers are becoming more cautious about what they put into their body – they just want simple, natural and authentic foods. According to the Organic Trade Association in the US, organic food sales has tripled over the past decade and increased 11% in 2014 to US$35.9 billion. In addition, Canadean, a firm specialized in analysis across the Consumer Markets Value Chain, has released a report “10 Trends to Watch in Fast-Moving Consumer Goods in 2016”, in which they state “consumers embrace products from smaller producers.”

Acquisition of smaller brands

Fully aware of this fundamental switch in shoppers’ mindset, Big Food cannot risk resting on their laurels and some of them proactively acquire brands that sell organic food and healthier food. The household brand Campbell, faced with declining sales in canned-soup consumption, has kept a finger on the pulse of the food industry – in 2012, it paid US$1.56 billlion to acquire Bolthouse Farms which sells fresh juice and packaged carrots. The acquisition has allowed Campbell to be more in touch with the consumers’ preference of fresh and healthier foods. The legacy soup company also knows that their original recipe for success needs an overhaul in order to stay on top of the game. Therefore it has put Jeff Dunn, who had been president of Bolthouse, in charge of Campbell’s new “packaged fresh” department. The brand is betting on the more flexible management operations of Bolthouse to help it navigate in the uncharted territory of natural foods.

For Hormel whose most best-known product is Spam, their acquisitions have paid huge dividends. The burgeoning natural food sector has not dealt a heavy blow to the sales of Spam (sales of US$300 million and an annual growth of 3% each year are recorded) and its overseas markets look set to thrive. For example, South Koreans consume US$175 million of Spam every year; at the end of 2016, Hormel is opening a factory in Jiaxing, China and China’s middle-class may embrace Spam for its convenience. However, it is not the main reason why Hormel has doubled its revenue in the past decade from US$5.4 billion to $9.3 billion. In the past five years, it has spent more than $2.3 billion to acquire other brands, including Wholly Guacamole, Muscle Milk, Applegate Farms and Justin’s (a much raved-about nut butter company). The list of brands undoubtedly indicates the food giant’s inclinations – buying brands that are remotely like Spam.

The proverb “if you can’t beat them, join them” rings particularly true in the current food world. Danone announced in July that they agreed to buy WhiteWave for US$10.4 billion. If the deal comes through, Danone, a dairy company based in France, will have wider access to the US market through WhiteWave. Danone CEO Emmanuel Faber says, “Danone does not need WhiteWave to hit its 5% growth by 2020 target, noting that the transaction would add only 0.5% to 1% additional growth annually.” Nevertheless, Danone has a bigger vision in mind –owning both high-end dairy and plant-based alternatives will certainly cement its top position in the ‘milk’ beverage category.

Betting on Food Startups

As food techs have been generating buzz, Big Food companies have caught on the trend. In February 2016, Campbell Soup announced that it is launching a US$125 million venture capital fund called Acre Venture Partners to invest in promising food startups. CEO Denise Morrison states, “We want to aggressively participate in the “disruption” in food trends. We believe that defining the future of real food requires new approaches, new business models, smart external development and an ecosystem of innovative partners.” Many Big Food companies in fact share the vision as Campbell – General Mills has launched a venture capital arm 301 Inc. to fund small regional startups, even though 301 Inc. was initially incubated to develop their own small, disruptive brands. General Mills believes it is more sensible to invest in startups than conceive a new brand from scratch. There is another upside for Big Food companies to invest in food startups – they may not have to acquire them at a hefty price if they become a publicly traded company somewhere down the road.

Venturing & Emerging Brands (VEB), Coco-Cola’s private equity arm, has invested in many beverage brands, such as Honest Tea, Blue Sky Soda and Zico (coconut water). It looks for and develops the brands, making varying levels of investment by phase. As a brand matures on the market, it will eventually migrate from VEB to join one of the business units of Coco-Cola. For example, Honest Tea has graduated to the Water, Teas and Coffee business unit.

Makeover of Big Food

Nestle, the goliath of the food giants, has treaded a radically different path. Not only has it gradually been reducing sugar, salt and saturated fat in some of its products, but it has also set up the Nestle Institute of Health Sciences. It is developing products with health benefits and some of them are already on the market under the brand ‘Nestle Health Science’. Some of its products include: Betaquik (a drink for people with epilepsy), Resource Support Plus (a high-protein drink for cancer patients), Optifast (a line of snacks and beverages for the obese). This is Nestle’s bold attempt to steer away from its core business of selling confectionery and position itself as a scientifically driven “nutrition, health, and wellness company.” What is more, Nestle is a major investor of Inventages, a venture capital fund focused on nutrition and wellness. However, their approach has drawn backlash as Bloomberg Businessweek states, “Nestle would sell a problem with one hand and a remedy with the other.”

All these examples point to one fact – major food companies are taking an active role in adapting to the consumers’ preferences. Otherwise, they will fall behind and may even become obsolete in the long run. The takeaway for consumers is that they can indeed help influence the food industry by making smarter and healthier choices in the supermarket.

 

 

 

 

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