Nick Fereday has played an integral role for our FoodBytes! by Rabobank pitch companies. In 2016, he was the moderator for the “The Emerging Startup Ecosystem” panel at FoodBytes! San Francisco and most recently was a mentor this past June at FoodBytes! New York. Nick has been sharing his expertise in consumer trends with our pitch companies and bringing his insights to help our startups understand the changing dynamics of the industry. Read his talking points below.
Good Soup, Denise
By Nick Fereday, Executive Director, Food and Consumer Trends, Rabobank
In this month’s Talking Points, we highlight some key themes from two recent food events in North America: the Consumer Analyst Group of New York (CAGNY) conference for large public food companies and the awesome Natural Products Expo West.
CAGNY: Same Venue, Same Problems
In late February, many of the leading food & beverage companies in the U.S. presented at the annual CAGNY conference in Boca Raton, Florida. As one would expect with public companies speaking to an audience full of their principal shareholders (institutional investors such as pension and insurance funds), their CEOs tried their best to give a Panglossian spin on how well they are doing, while at the same time fessing up that they were “not satisfied” or “disappointed” in their performance and need to spend more time cultivating their own garden. In terms of headlines from the event, it was going to be hard to top the developments of the preceding week, which is a time when companies typically drop any bad news to avoid being grilled on it at the conference. This year however, the week was dominated by Kraft Heinz’s sensational, but quickly abandoned, USD 143bn bid on Unilever. Notwithstanding this pre-CAGNY high drama, here are some takeaways:
1. Pressing all the Growth Levers
The fundamental problem Big Food is facing remains the negative to flat growth in their core food categories resulting in a flat-lining top line. As an industry, top-line sales averaged just 1% per year over the past five years and a miserable 0.3% in the last year. Declining sales, which have worsened further during Q1 2017, were attributed to shrinking volumes—with fewer folk buying their stuff, volumes have been down 1% to 2% for the last couple of years and about 5% so far this year—and lower prices as a result of heavy discounting through price promotions, as companies fight among themselves for a greater share of the consumer’s packaged food dollar.
As if reading from the same menu, companies have responded to this challenging environment with the same solution: frantically pressing the usual growth levers of innovation (mainly through product renovation) and acquisitions, from acquiring equity stakes in emerging brands (such as Kellogg’s venture fund investing in Kuli Kuli Foods) all the way to billion dollar deals (such as Danone’s purchase of WhiteWave). But to date, all this has had a limited effect. Interestingly, many companies are now categorizing their portfolios into growth and foundation brands (the latter being about 20-33% of sales, depending on the company). Foundation brands are viewed as cash cows with little growth prospects and possibly one step away from divestiture, as companies ultimately concede defeat on these brands. Truth be told, these companies probably have more foundation brands than they are prepared to admit. In 2017, should your breakfast cereal or canned soup business really be your top priority? Yes, says General Mills and Kellogg’s. No, says Campbell Soup.
2. Consumer First? Sometimes
Companies have been talking about the changing tastes of consumers for some time now and touting their ability to respond effectively. With snacking—which is both a category and lifestyle choice—clearly companies have gotten the message. Companies lined up to discuss their snacking initiatives. Kellogg’s reiterated their ambitions to become a “global snacking powerhouse”, PepsiCo talked about a renewed focus on the euphemistic ‘better-for-you snacks’ such as low-calorie ready-to-eat popcorn, and Snyder’s Lance, a pure-play snacking company, announced it is moving closer to its goal of having half of its portfolio as ‘better-for-you snacks’ by 2019. And whereas Campbell Soup was more about the consumer of the future moving from ‘mindless munching’ to ‘purposeful snacking’, Hostess reminded us of the perennial desire for indulgent snacking: chill guys, not everything has to be about health & wellness. Even Tyson threw its hat into the ‘on-demand’ eating ring with plans to build a modern growth portfolio including Hillshire Snacking, an adult snacking brand, quoting Hartman data that less than 10% of U.S. adults did not snack on something in the last 24 hours.
3. Catch Me if You Can
As any shrink will tell you, it is often what goes unsaid that is the most interesting and revealing. Despite dominating headlines in the build-up to the conference, there was barely a mention of 3G Capital during the proceedings. Ever since 3G’s Valentine’s Day acquisition of Heinz in 2013 and merger with Kraft in 2015, U.S. food companies have been engaged in a rather complex relationship with this potential suitor. On the one hand, the unwelcome attention has forced these Rubenesque companies to slim down and boost margins by scouring through their own business operations for savings and adopting their own versions of ZBB to become a less attractive target. But at the same time, 3G’s advances and the endless Wall Street rumor mill around ‘Who will be next?’ has helped bolster company valuations relative to the S&P, despite poor earnings.
So for U.S. food companies, 3G’s move on Unilever must have caused alarm as it suggests an intent to not only look for an overseas bride, but that their love affair with food maybe coming to an end, as Unilever’s household and personal healthcare non-food business is about 60% of sales after almost a decade of divesting of food brands. In the same way that Kraft Heinz’s bid of Unilever has forced the Anglo-Dutch company to undertake an urgent strategic review by April, so too U.S. food companies might want to consider if they too have mishandled their relationship either by being a little too aloof or too successful at cutting costs, as they calculate 3G’s waning interest on their valuations.
4. Beyond Five Years
Campbell CEO Denise Morrison was probably the leading futurist at the event, outlining a vision for the company that went way beyond the typical five-year planning horizon. She identified four promising platforms based around: i) the ever-increasing convenience of shopping for food online, ii) the transformation of the snacking category from impulse-driven mindless munching to purposeful snacking where snacks provide functional benefits, iii) personalized nutrition with curated food options delivered to your door and, iv) locally sourced foods from a transparent food chain. (One can only imagine her frustration after she met President Trump the week after CAGNY for him to remark, “Good soup.”)
Anaheim: The Greatest Food Show on Earth.
In many ways, the vastness of the Natural Products Expo West caters to every taste. There really is something for everyone, but here are a couple of observations on this year’s show:
1. Mainstreaming of Event
What started out in 1980 as the last redoubt for hippies who survived the 60s and 70s, the Natural Foods Expo has become an important showcase for established and emerging brands in the natural and organic space. Every year, and this time Rabobank was out in force, our visit to the venue in the heart of Disneyland seems less and less ironic. With about 3,100 exhibitors, of which about 600 companies were showing off their wares for the very first time, it is perhaps the greatest food show on earth.
The show attracts players from all corners of the industry, from foodies to specialty retailers, big- box supermarkets to established food players as well as the finance guys. Participants come with a range of objectives, from looking for interesting products to differentiate their store, potential acquisitions to expand their portfolios, new takes on tired categories or inspiration for private label copycat products, to the all-important networking and community building. With over 80,000 attendees, it is only a matter of time before the expo has its own dating app.
2. It’s the Growth Rate, Stupid
Of course, the draw for everyone is the impressive growth rates—unstoppable if you believe the hype—of consumer demand for natural and organic products, which continue to outshine the growth rates of the wider industry (see above). According to the conference organizers, sales of organic and natural foods grew by about 9% over the past year, as consumers increasingly perceive these premium products as being healthier, better quality and from an ethical viewpoint just ‘better’ than conventional foods weighed down by too many food ingredients. (There are only a few value propositions at this show, and natural and organic foods are typically 25% higher than their conventional counterparts.) And remember, most of the products on display are shelf-stable packaged goods—the only fresh fruit I saw was the apple I lifted from my hotel buffet.
As we never tire of saying, we maintain the future of packaged food is bright; it is just not necessarily the type packaged foods we are used to eating. This is not as scary as it sounds. We generally have an optimistic view on the outlook for most food categories. Breakfast cereals may be down, but not if you are using ancient grains as an ingredient or have innovative products, like Back to the Roots, The Soulful Project’s hot cereal and Sherpa’s barley cereal. Similarly, yogurt is a growth category if your products are targeting the premium end of the category. Even the much- maligned soup category has pockets of growth, you just have to call it bone broth.
Interested in pitching at FoodBytes! Austin, apply today! Applications close Sunday, August 6th, 2017 at 11:59 CT.
Read the report on the RaboResearch site here.