Big Food's Big Problem: Consumers Don't Trust Brands
Industry Giants Shift Strategy To Win Back Health-Focused Americans
This rather unappetizing statement was tucked into a request for proposals recently sent to ad agencies: "Most of our food supply comes from factory farms, is dependent on GMOs and chemicals, and is not sustainably grown or raised."
The inflammatory language sounds like the typical musings of a fiery activist ready to take on Big Food. But it actually came from the Kashi brand owned by industry giant Kellogg Co. The brand is seeking ideas to "re-establish our identity in the natural foods movement."
The RFP, which was recently obtained by Ad Age, is a small but telling example of how the food industry has been shaken from its core, forced to reinvent itself in the face of shifting consumer demands. Families once reliably heaped their plates with products such as Stove Top stuffing from Kraft Foods, Hamburger Helper from General Mills and Kellogg cereals, along with similar products from other processed food titans. But now those consumers are increasingly migrating to smaller, upstart brands that are often perceived as healthier and more authentic.
Quite simply, big brands are losing one of their most valuable assets: consumer trust. And the fight to regain it will shape the industry for years to come.
The rapidly shifting tastes have forced executives into taking some dramatic steps. They are racing to reformulate iconic products like Kraft's Mac and Cheese, while acquiring smaller brands in hopes of reinventing themselves to appeal to today's finicky consumers. But their search for growth comes amid intense pressure to cut costs as bottom-line focused private equity firms such as 3G Capital lurk.
Some $18 billion in sales have shifted from large to small companies from 2009 to 2014 across all consumer packaged good categories, according to report by Boston Consulting Group and IRI. Credit Suisse recently isolated the changes in market share among food and beverage companies and found that the largest 25 companies saw their control slip from a combined 49.4% share in 2009 to 45.1% share in 2014. Their "dominance of the core U.S. market seems to be slowly eroding," Credit Suisse stated in a report.
Campbell Soup Co. CEO Denise Morrison recently summarized the situation using unusually stark language when she told financial analysts at a February meeting that "we are well aware of the mounting distrust of Big Food." She added that "we understand that increasing numbers of consumers are seeking authentic, genuine food experiences and we know that they are skeptical of the ability of large, long-established food companies to deliver them."
Months later, her confession is still resonating. Just look at the actions of some of the nation's largest retailers, such as Target, which recently committed to overhauling its grocery offerings in favor of less-processed foods. The company controls $15.6 billion in U.S. food and pet supply sales, according to Supermarket News.
The tipping point for Big Food might have come in the middle of 2013 when the shift away from heavily processed foods become more evident, Sanford C. Bernstein analyst Alexia Howard observed in a recent report. She cited several factors: Millennials began forming households after the recession that are led by moms who are "better educated and are less brand loyal than earlier generations."
The rise of social media has also led to a "massive online conversation about what to eat and what to avoid -- and concerns about the additives in many heavily-processed foods are on the rise," Ms. Howard stated. Lastly, advancement in distribution methods are extending the shelf life of fresher, less-processed foods.
"We are seeing a clear shift into healthier foods like fresh fruit and vegetables, granola, honey and ready-made salads and away from stodgier options like frozen TV dinners, Jell-O, pudding, canned pastas, cereal and toaster pastries," Ms. Howard said.
At Target, executives are chaning the grocery assortment to appeal to shoppers that want "more choices that support their wellness goals," CEO Brian Cornell said during an analyst meeting March. That, he said, means "more natural products, more organic, more gluten-free items that have simple, cleaner ingredient labels."
The strategy shift is an example of how retailers are gaining leverage over their suppliers. Deanie Elsner, who until recently was chief marketing officer for Kraft Foods Group, said consumers assume that if a brand is carried at chains such as Whole Foods and Trader Joe's, then it is O.K. "They use retail channels as a stamp of credibility and a stamp of approval," she said.
What is healthy?
But even the definition of what is healthy has become harder to discern for big food marketers. "We've never seen the consumer as confused as they are today," PepsiCo CEO Indra Nooyi staid on a recent earnings call, stressing that she meant that in "a neutral way, not a negative way." Real sugar -- once a health enemy -- is now perceived as good for you, she noted, while people are "willing to go to organic, non-GMO products even if it has high salt, high sugar, high fat."
One thing is clear: Anything seen as artificial is definitely out. And that has forced marketers into changing formulations for even the most iconic of brands.
Consider Kraft, which recently announced it was taking artificial preservatives and synthetic colors out of its original Macaroni & Cheese brand, replacing the synthetic colors with "those derived from natural sources like paprika, annatto and turmeric." Nestle USA has pledged to remove artificial flavors and colors from its chocolate candy brands, which include Butterfinger and Nestle Crunch. Last year, General Mills took aspartame out of Yoplait Light yogurt.
Walmart -- the nation's largest food retailer -- on May 22 announced a new policy urging suppliers to reduce their use of antibiotics on farm animals, limiting it to medical purposes, not to spur growth. The company also called for public reporting on antibiotic use. "Our customers have told us that they want to know more about where their food comes from, and how it was sourced," Walmart stated on its corporate blog.
Marketers are also chasing the latest trends by changing products to remove gluten -- like General Mills is doing with Cheerios -- while overhauling production lines for some products to gain GMO-free certification.
Most companies are pledging that the changes won't change taste. A Kraft spokeswoman said the new Mac & Cheese -- set to debut early next year -- will retain the "distinctive taste, appearance and texture consumers expect."
But there remains a risk of turning off loyal consumers who like their big brands just as they are. For instance, will kids still eat Mac & Cheese if it loses even just a hint of its distinctive radioactive orange color? "One of the attractions of iconic brands is that they have remained unchanged. They've withstood the test of time," said Nick Fereday, an analyst at Rabobank International who covers food trends. "It's not as if no one is buying these products. They are still being sold by the millions."
Kraft executives are fond of saying that the company's products are found in 98% of American households. The company's Mac & Cheese sold $901 million in sales last year, according to Euromonitor International.
And it's not as if junk food is going away. "There are lessons to be learned from iconic brands that remain irreverently relevant and laugh in the face of today's health and wellness trends," Mr. Fereday stated in a recent report to clients. For instance, PepsiCo's Frito Lay North America division -- whose portfolio includes Doritos and Cheetos -- grew its net revenue by 3% in the first quarter to $3.3 billion. Most of Doritos innovations have nothing to do with health. They are about fun, like a recently launched limited-edition "Roulette" bags featuring one out of every six chips that are super spicy.
But the problem for now is that for the most part big brands are not growing as fast as they once did. So to maintain profit margins and satisfy Wall Street, marketers are undertaking seismic cost-cutting programs that could imperil long-term brand growth. The cuts are occurring under the shadow of 3G Capital, a private-equity firm known for orchestrating takeover deals and then squeezing out cost-savings from the acquired companies.
The 3G effect
In 2013, 3G teamed with Warren Buffett's Berkshire Hathaway to acquire H.J. Heinz, which has since eliminated some 3,800 positions. Earlier this year the new Heinz announced plans to acquire Kraft Foods Group, spreading fears inside Kraft and beyond that 3G could again wield its knife. In a recent note to employees, Kraft CEO John Cahill said the company is considering implementing "zero-based-budgeting." The method, which is emerging as a popular tool for struggling food companies, involves making departments justify all of their expenses every year.
"3G and Buffett have pulverized the food industry market, particularly in America with serial acquisitions," Nestle Chairman Peter Brabeck-Letmathe said at a shareholder meeting in April. "3G's partners are known in our industry for ruthless cost-cutting and have already proven numerous times that they are capable of reducing operating costs in particular by between 500 and 800 basis points, which has a revolutionary impact on all the other members of the industry."
While part of 3G's methods include reinvesting cost-savings back into marketing, the verdict is still out on the firm's approach. "3G's focus on short-term profitability and cash flows does pose risks to brand health, particularly to future growth," according to a discussion document on the firm by McKinsey & Co. obtained by Ad Age. McKinsey quoted an unnamed former Heinz exec as recounting how 3G even dictated the number of pencils and other office supplies allowed to be purchased. "It's not a fun place to work; you can get some culture blowback," the person said.
But McKinsey also listed plenty of positives about 3G, saying its affiliated companies provide an attractive setting for "high-performing individuals." The document noted that brands slated for cost-cutting have had "minimal consumer backlash to date." Sometimes brands get more media support under 3G, like Heinz-branded ketchup and condiments (with a new campaign, shown above), which increased spending from $2.3 million in 2013 to $15.7 million in 2014, according to Kantar Media.
3G did not respond to a request for comment by press time.
Cutting too deeply can risk harming a company's "fundamental source of value," such as organizational capabilities, said David Garfield, managing director and co-leader of the consumer products practice at AlixParners, a global business advisory firm. But "given all of the challenges in the marketplace," including sagging demand, "just continuing on with business as usual, even with nips and tucks, is not going to yield sufficient breakout performance," he said.
Buying their way in
One way forward is to scoop up smaller, faster-growing brands that have a built-in foodie following.
ConAgra, known for iconic frozen food brands like Marie Callender's and Banquet, in May acquired Blake's All Natural Foods, which makes natural and organic frozen meals like pot pies and casseroles. The acquisition came after the company last year basically conceded that it had wasted money trying to lure millennial consumers to three of its largest brands: Healthy Choice, Chef Boyardee and Orville Redenbacher's.
"We have spent too many resources on these brands, trying to penetrate new consumer segments by overcoming their perception barriers. And frankly, [it] hasn't worked," then- CEO Gary Rodkin told analysts in February of 2014, signaling the company would target marketing at core buyers instead. (He retired earlier this year.)
Campbell Soup has been particularly aggressive in overhauling its portfolio. Ms. Morrison frequently talks about a "dual mandate" strategy of strengthening Campbell's slower-growing center-of-the-store core business -- including soup -- while moving into faster growing categories, such as fresh and organic foods. Campbell bought Bolthouse Farms -- which makes foods like fresh beverages and salad dressings -- in mid-2012, and since then the brand's sales have grown from $689 million to about $830 million, Bernstein noted in a recent report.
But there are examples of small brands suffering once they are acquired by one of the food giants. Kellogg Co. had initial success after buying the Kashi brand in 2000, but the brand has since faltered. Mistakes included moving operations from Kashi's California birthland to Kellogg's corporate home in Michigan in 2013. Kashi withered under negative press in 2012 when anti-GMO activists spread word that soy used by the brand was genetically modified. Since then Kashi's cereal sales plummeted from more than a half-billion dollars to near $400 million, Bernstein noted.
Eyeing a comeback, Kellogg recently moved Kashi operations back to La Jolla, Ca., and has pledged the brand will operate autonomously. The request-for-proposal for new Kashi advertising does not mention Kellogg, referring instead to the "Kashi Company," which also includes the Bear Naked brand of granolas and bars.
General Mills is seeking to build tighter bonds with natural food advocates through a recently formed "natural and organic center of excellence" that includes a small team of experts reporting to Chief Marketing Officer Ann Simonds. The group is charged with lending "oversight, expertise, inspiration [and] collaboration" across the company's growing portfolio of natural and organic brands, Ms. Simonds said in an interview. For instance, the team will represent General Mills at natural food trade shows, she said.
Ultimately, General Mills wants to grow its $600 million natural and organic food business to $1 billion by 2020. A key brand in that endeavor is Annie's, which was acquired late last year and whose line of pastas, snacks and other products are made without artificial flavors, GMOs or synthetic preservatives. In a move to preserve Annie's culture, General Mills has kept the brand's headquarters in Berkeley, Calif, rather than moving it to its Minneapolis corporate campus.
"You don't really integrate an acquisition like Annie's," Ms. Simonds said. "You want to amplify them," she added. "It's essential that we continue to let them do what they do best while we bring what we do best."
Similarly, Mondelez International -- whose brands include Oreo and Nabisco -- is taking a hands-off approach with its acquisition of Enjoy Life Foods, a private company it bought in February that markets allergy-friendly and gluten-free cookies, chocolate, snack bars and savory snacks. "We simply want to help them continue to be successful as opposed to imposing a big- company mentality," said Mondelez spokesman Michael Mitchell.
Of course, the small company acquisitions "don't come cheap," and are likely to take a toll on return-on-investment as they take time to build scale, Sanford Bernstein's Ms. Howard pointed out in her analyst's report. Also, "one of the unknowables is how many of these privately-held challenger brands will be willing to sell."
Plenty of small brands are doing fine on their own, like Kind snack bars, which has grown its share of the U.S. snack bar category from 0.6% in 2011 to more than 7% recently, with sales of $280 million, according to Bernstein. Perhaps more worrisome for big companies is that the small guys are starting to attract top marketing talent.
Kind recently lured Lisa Mann from Mondelez, where she held roles including VP-cookies. In marketing circles she is known as the woman who green-lighted Oreo's "You can still dunk in the dark" tweet during the power outage at the 2013 Super Bowl that was seen as a watershed moment for real-time marketing. Since January she has overseen marketing at Kind, whose bars were founded in 2003 on the principle of being "kind to your body, your taste buds and the world."
"I was really excited to go to a company that was at the tailwinds of growth and so much opportunity," Ms. Mann said in a recent interview. Indeed, while big companies are cutting costs and eliminating positions, Kind is growing its headcount. The company has more than doubled its full- and part-time employee base from 150 in 2012 to 445 as of 2014. Hirees include young marketing talent that is enticed by the company's mission, Ms. Mann said.
"They want less bureaucracy," she said. "They want to be a part of something bigger than themselves. And they are joining companies like Kind, as opposed to some of the big CPG companies."