As recently as a decade ago, Campbell Soup Co. was posting tidy volume gains for its ubiquitous red-and-white label soups. Today, company watchers doubt Campbell can even stabilize declining sales of its condensed soup, which, at $1 billion-plus, accounts for one-sixth of the company total. "They're absolutely right: It's a challenge," said Campbell Chairman-CEO Doug Conant. "Nobody said it was going to be easy."
Like Campbell, the country's food marketers are finding growth hard to come by. Despite targets of double-digit earnings gains, food companies' average uptick in recent years has been closer to 5%.
Pumping up the volume has become more crucial for marketers unable to lift earnings in other ways. Ten years ago, food companies raised prices to increase margins and plotted global strategies to expand overseas. But now, said Banc of America Securities analyst Bill Leach, with pricing flat or even down in some categories like cereal, and a retrenchment of global expansion, those options are less appetizing. "There is not a lot of top-line growth," he said. And with U.S. population growth at a mere 1%, volume gains can come only at the expense of rivals-both in supermarkets and restaurants.
"[The food industry] is not just not growing, it's actually declining as more food dollars go away from home," said Mr. Leach. According to Department of Commerce research, food consumed away from home represented 40% of the total $848 billion food market in 2001, up from a mere 25% in 1981. Ironically, Mr. Leach pointed out, food-service distributor Sysco Corp., the company literally transporting product from factories to food-service outlets, is posting the double-digit earnings growth to which packaged-food marketers seem only able to aspire.
Credit Suisse First Boston analyst Dave Nelson paints the grim picture by the numbers: Kellogg Co., which posted negative volume, or unit sales, last year, projects volume growth of 2.7% in the indeterminate future. Campbell, which has seen little volume growth since 1999, despite an unusual upsurge of 5% in 2001, is now hoping for long-term volume growth of 3%, but the company concedes those numbers will be a "challenge" to reach by 2003. Hershey Foods Corp. had essentially zero volume growth in its fourth quarter and only 1% in its recently reported first quarter of 2002, despite projections of long-term growth of 3% to 4%.
General Mills enjoyed rare 6% growth over the last few years, but recently announced lowered earnings expectations for its fiscal fourth quarter following volume declines of 4%, and said it hopes to reach volume growth of 4% in 2003, down from an expected 7%. And even with relatively modest volume growth of about 3%, Kraft Foods, North America's largest food company, is taking Wall Street by storm-its stock price is up roughly 30% since its initial public offering in June.
Still, food marketers continue to seek the holy grail of growth by every means possible, from buying it via acquisition to stealing it-and key for those this week attending the Food Marketing Institute's annual supermarket show-building growth via merchandising, new distribution frontiers and new products.
Behemoths have been buying behemoths, yielding the recent Kraft Foods/Nabisco, Unilever/Bestfoods, Kellogg/Keebler Foods, PepsiCo/ Quaker Oats Co. and General Mills/ Pillsbury Co. combinations. Ostensibly, the moves were made to compete within the increasingly consolidated food-retailer environment, which requires super-sized scale, and also to gain synergy savings that can be put toward investments in much-needed marketing and innovation or directly to the bottom line.
This is the year many recently merged companies must prove themselves. General Mills showed a 48% decline in diluted earnings per share and a drop in domestic retail volume for its fiscal third quarter as a result of the Pillsbury integration (numbers that a recent profit warning for its fiscal fourth quarter show are not fast-improving). But PepsiCo's buy of Quaker doesn't seem to have slowed the snack and beverage giant at all. In its first-quarter earnings, PepsiCo posted volume growth of 5% and earnings growth of 14%, beating Wall Street estimates.
For those who haven't been so lucky, restructuring has been a common tactic to restore growth. Con- Agra in mid-1999 began its Operation Overdrive, intended to turn the tangled mass of retail, food-service and agricultural brands into "America's favorite food company," even renaming the company ConAgra Foods. Nearly three years later, the company is still in flux (with rumors of the sale of many of its fresh beef and pork businesses increasingly pervasive) and profitability is still elusive. "This isn't going to be won overnight, just like it wasn't lost overnight," said Tim McMahon, senior VP-communications and marketing.
H.J. Heinz Co. knows that well. After 19 restructuring write-offs in 20 quarters, Heinz still reported earnings declines for its fiscal third quarter ended Jan. 30 of 25%. Going through five years of restructuring "tends to put people off balance ... and makes it difficult to keep focused on day-to-day results and driving forward," said Art Winkleblack, Heinz's exec VP-chief financial officer. That said, though, the company hopes to "leverage all these improvements to the bottom line," though just what kind of earnings can be expected for fiscal 2003 has yet to be determined.
General Mills has been a shining example of playing the share game: In the last 20 years, only three categories have switched leaders in dollar share-cereal, yogurt and cake mix-and General Mills was victorious in each. In cereal, it overcame longtime leader Kellogg, although the one-time leader has been fighting back and has overtaken Big G in some recent months. In yogurt, General Mills' Yoplait passed category initiator Dannon Co.; in cake mix, its Betty Crocker franchise years ago surpassed Duncan Hines, now owned by Aurora Foods.
But the definition of stealing share has broadened in recent years. "We want to be visible at so many points of distribution," said Keebler President David Vermylen, "so that when you're at a Hampton Inn, and you're hungry, you have the choice of four or five Keebler items." In 1996, he said, Keebler saw revenues of less than $10 million in vending; today it is "many multiples of that."
Kraft has a similar notion for Nabisco. "Adapting products, packaging and programming to growing channels" on such franchises as Oreo and Ritz is central to the company's growth, said Kraft Foods North America President-CEO Betsy Holden.
Kraft has also looked beyond direct category competitors. "We're all in the battle for share of stomach, and it helps to broaden the frame of reference for your categories and the arena in which you compete," said Ms. Holden. Kraft, for example, forged alliances with Taco Bell, Starbucks and California Pizza Kitchen and has positioned DiGiorno pizza against delivery to turn the food-away-from-home trend to its advantage.
Product innovation, advertising and promotion are taking on more prominence as routes to build volume. Campbell's Mr. Conant outlined a "transformation plan" to achieve and sustain 3% to 4% annual sales growth for its 2003 fiscal year begun in August. Key to the program is an additional influx of roughly $200 million in ad spending (though the total has since shrunk slightly).
Ad spending is often the first to go in a profit crunch, however. "In recent years, CEOs, in the hopes of seeing double-digit earnings growth despite slow revenue growth, have resorted to restructuring and in many cases cutting advertising, which denigrates the quality of the business. Then the CEO is fired, advertising is restored and the new CEO cuts advertising to make the numbers," said Banc of America's Mr. Leach. "It's a vicious cycle."
"What [food manufacturers] are dealing with is a mature category with a fairly stable consumer base, a price-constrained environment and a consolidated retailer universe that is driving [retailers] to spend more to support their retail brands than the manufacturer's own brands," said Jon Kramer, CEO of Grey Global Group's J. Brown/LMC. "You get a lot more short-term thinking because Wall Street is driving many corporate decisions."
Mr. Kramer said retail powerhouses like Wal-Mart Stores often look for price-driven assortments, leaving little room for food marketers to introduce value-added products that would offer them the opportunity for premium prices. That's driven up trade promotion at advertising's expense. The 2001 Cannondale Associates Trade Promotion study found spending on retail promotion rose 16% in the last four years to reach 51% of consumer package-goods marketing budgets.
Moreover, recent changes in accounting rules require marketers to adjust net sales to reflect trade-spending outlays. Andrew Lazar, analyst with Lehman Brothers, said the restatements have shown that at least 25% of industry sales growth over the past two years has come from promotional spending.
"Manufacturers sell brands but don't sell a category, which is a problem now that a handful of retailers are controlling the destiny of what's going to happen to them," said Mel Korn, CEO of Publicis Groupe's Collaborative Marketing Worldwide. But some marketers are waking up to the need to advertise a category to build volume: Top cereal marketers including Kellogg, General Mills and Kraft recently linked for a $50 million campaign to boost cereal consumption modeled after the dairy industry's "Got milk?" effort.
Campbell proudly points to the fact that its chicken noodle, tomato and cream of mushroom condensed soup are all on the list of top-10-selling grocery items. But that fact alone sheds light on the industry's problem.
Creating new-product platforms that translate into balance-sheet-altering propositions has proved elusive. Aiming to do so, marketers have jumped on trends such as nutraceuticals, or foods with ailment-fighting properties (see story, left). But most have become phenomenal failures or little more than niche businesses.
The latest hope for growth-convenience and snacking-(with the promise of expandable consumption)-likewise have yet to drive anyone out of the doldrums.
While many marketers, including Hershey President-CEO Rick Lenny, have pointed to the $40 billion-plus snack market as a significant opportunity to drive sales, Kim Feil, division president-worldwide marketing at Information Resources Inc., recently told a group of snack marketers she was "surprised at how low growth rates are in snacks."
Sales for confection, bakery, salty and specialty snacks combined have seen steady 3.7% growth over the last five years, but she said that's insufficient for a category "dead on where consumer trends are."
Looking back over the last three years of IRI's New Product Pacesetters-an annual list of those products that achieve a minimum of $7.5 million in revenue and distribution in more than 50% of supermarkets-Ms. Feil said a "shocking" 84% of products were extensions rather than innovation. That's a missed opportunity, she said, considering that innovation yields 55% higher revenue in year one than a line extension. "Manufacturers in general are scurrying to what they think are safer line extensions that have predictable but lower returns."
Some mega-franchises do bear extending. Kraft's Oreo, an $860 million business last year, is on its way to $1 billion with the addition of line extensions, including Mini Oreos, Single Serve Oreo Packs to Go and Chocolate Creme Oreos. The chocolate creme variety alone ratcheted up $70 million in sales in its first eight months, 70% of that incremental, Kraft's Ms. Holden said. Snacks overall are now a $10 billion-plus business for the company.
There are wholly new products that have been hits-but that level of success comes rarely. "If we thought it was all about home runs, we'd be setting ourselves up for disappointment," said ConAgra's Mr. McMahon. "What we would like to do is build our understanding about just getting runs on the board, period."
BLOCKING AND TACKLING
"A lot of it comes down to execution: Which of the companies can do basic blocking and tackling better than the rest," said Credit Suisse's Mr. Nelson. "[Few companies] can or will come up with blockbusters, they've got to do the little things right."
None of that dims the determination of food companies trying to break out of the low-growth cycle, a task made even more difficult by changing consumer trends. "It's a harder industry to do business in today than it was 20 years ago," concedes Keebler's Mr. Vermylen. "The `Leave it to Beaver' scenario of sitting down to a family dinner disappeared in the 1960s."
In the words of Campbell chief Doug Conant, it won't be easy.