The $378 billion U.S. food industry is facing an upheaval not seen since almost a century ago, when Michael Cullen pioneered the first self-service supermarkets. Today consumers are turning away from the mass-produced national packaged brands that thrived under the supermarket model and favoring healthier, local and more “authentic” food. To respond, many packaged food companies have introduced healthier or trendier products, or acquired smaller companies that make them. But they need to do far more – and quickly — or risk becoming as irrelevant as Sears Roebuck, with only low-margin commodity products left to sell to a declining audience.
In 40 years of working at high levels inside so-called Big Food companies as an executive and consultant, I’ve come to believe that the packaged food giants won’t move fast enough until the executives who run them break free of their mid-20th century mindset about the ingredients to success in the grocery aisles. These executives can no longer assume that consumers will blindly toss their products into the grocery cart. They must shift their focus from marketing to innovation, rethink what convenience means, and actually embrace (rather than disdain) the many activists who have been attacking them. This challenge serves as a lesson for managers, in any industry, who are tempted to double down on the strategy that got them to the top.
Campbell’s Soup CEO Denise Morrison, who stepped down on May 18, is one of the latest casualties of this food revolution. Despite making several bold moves to prop up the sleepy soup company, Morrison nonetheless took the fall for Campbell’s inability to meet consumers’ growing preference for healthier food and to protect its iconic red-and-white can. Interestingly, Campbell’s Board of Directors has just decided to sell the company’s “fresh” businesses, such as Bolthouse Farms, as the company was unable to adapt to a different distribution system. Morrison was just the latest in a long line of fallen packaged food CEOs – 15 since early 2016. The top 10 packaged foods companies have lost a total of $20 billion in revenue over the past three years.
The Forces Behind the Revolving Doors
Why is this happening? At the heart of it is a bifurcation in how food is formulated and sold. Healthier, lower-calorie and locally made foods have been siphoning off more consumers, while big players like Wal-Mart and Amazon have been disrupting traditional food selling channels. Changing consumer preferences, led by the 70+ million strong millennials, are undermining the tried-and-true formula of pricing and promotion, as the CEO of ConAgra said so himself recently.
Moreover, consumer sentiment, so easily shaped and reinforced by social media, has turned against manufactured food and the big companies that make them. Influential nutrition activists have blamed Big Food for making us fat and unhealthy; social media allows bad news about unethical business practices to travel fast. Not surprisingly, a 2015 report by the research firm Mintel showed that 43% of adults aged 21 to 30 did not trust large food manufacturers and 59% said they’d stop buying any food that they deemed “unethical.” About 90% of the top food brands have seen their market shares decline, especially among millennials who have less loyalty to brands than their parents and who consider ethics, transparency and authenticity when they make their buying decisions.
The Industry’s Largely Anemic Response
This is not to say that packaged foods companies have done nothing. Most companies now regularly report their progress in reducing offender ingredients such as sodium, sugars and fats. Others have made serious commitments to pull calories out of their products, like the major confectioners and soft drink companies. Food giants are also buying up smaller “natural” and “organic” competitors: Applegate Farms is now owned by Hormel; Honest Tea is part of theCoca-Cola KO +0.43% portfolio; Mondelez International in May bought Tate’s Bake Shop, a premium cookie brand that mimics homemade. Some are changing their manufacturing processes and their raw materials sourcing to accommodate consumers who want organic, non-GMO or gluten-free food.
These changes are commendable. But in the long run they won’t save the packaged food industry from the seismic changes under way. Down the road, you will see a deeper cleaving between the higher-margin specialty products – favored by consumers who have the most disposable income — and the commoditized cans, boxes and bags that have remained the stubborn focus of most food companies now. You’ll see more consumers easily customizing how they select their groceries, screening out food that has ingredients they don’t like or setting preferences for the foods they feel good about eating. PeaPod, the food delivery service that partners with local supermarket chains, already understands this; their online tool gives customers the ability to filter their choices by gluten-free, non-GMO, vegan or something else, removing “impulse buys” from the process altogether. And under CEO Morrison, Campbell Soup CPB -1.09%invested in Habit, a company that uses a person’s DNA to produce individually tailored food recommendations.
You’ll also see more big players betting on natural, organic and healthier foods, as Amazon did when it acquired Whole Foods. Consider that Amazon had the wealth to buy far bigger supermarket chains, but saw the biggest potential in a smaller chain that caters to more health-conscious consumers. A growing number of venture capital firms are also betting big on this trend, with innovative companies such as Hampton Creek, Impossible Foods and Beyond Meat securing funding from such sources. These well-funded players are inventing new channels and bringing non-traditional marketing savvy to skim off more of the customers who spend the most on food.
Shifting Mindsets, Not Just Ingredients
To survive, the established players in the packaged food industry need to be much bolder. They need to start thinking more like VCs and Silicon Valley startups, and less like utility companies with captive customers who have no choice. That means a big change in top executives’ attitudes about the ingredients of food company success. The days of making tasty (but calories-be-damned), attractively packaged products and convincing consumers to eat them through highly memorable advertising campaigns are gone.
It’s time for executives who run Big Food companies to change their formula for success. Five ingredients are crucial:
- Shift from being marketers to innovators. Big food historically spends only 1% to 2% of its revenues on research and development compared to 10% to 15% on marketing. The best minds in the food industry’s R&D labs need much bigger budgets and the license to develop the next generation of affordable, delicious and healthier products that people can feel good about buying. This shift also plays to consumer demands for more corporate transparency, which is often counter to clever marketing.
- Accelerate product conversion to better-for-you formats. Every packaged foods company is capable of improving their offerings, through nutritious ingredients, fresher foods, or smaller portions. As shown by several Hudson Institute studies, this is not just good business to meet the increasing demand for these items by health-conscious consumers, but also necessary to help those 70% of Americans who are overweight or obese.
- Rethink the meaning of convenience. Delivering convenience in the form of “heat-and-eat” products was the genesis of the packaged foods industry. “Convenience” once meant opening a can or, later, placing a box in a microwave. Today it means selecting ready-made meals from a prepared foods station or food court, having groceries delivered or buying a meal kit. Packaged foods companies must find new ways to play in the fresher, less-packaged world. Just because companies are sitting on billions of dollars of yesterday’s manufacturing equipment is not enough to justify a slow changeover. It will be too late.
- Embrace the move from mass to micro. Consumers want more choices, which means more varieties of foods and brands in smaller batches. Millennials in particular are proving to be less brand loyal, with 26 percent of millennials saying they are likely to “buy whatever brand they feel like at the time,” according to a Daymon Worldwide study. Customized nutrition, like that espoused by Habit, is on the horizon. This fights the very essence of the current business model to pour out mass quantities of identical items.
- Listen to the enemy. Food activists, a thorn in the side of Big Food, are also the harbinger of what mainstream consumers will want in the future. The proponents of organic, non-GMO, gluten-free, locally sourced foods were once lone voices crying in the wilderness. Known as “Well Beings” by researcher Natural Marketing Institute, now they’re in everybody’s kitchen. Companies would do well by sending fewer lobbyists out to fight activists and spending more time listening to their concerns, which are peeks under the tent about emerging trends.
A few big food and beverage companies have already started to make the bold moves necessary. Companies like Danone , led by CEO Emmanuel Faber, made smart strategic changes at the right time. Over the years the French company jettisoned beer, cookies and other unhealthy foods in favor of better-for-you products like yogurt, bottled water and infant nutritional products. Between 2010 and 2017, annual revenue has grown 45% (to EUROS 24.7 billion) and profit 50% (to EUROS 2.5 billion). Being an early mover to head off the anti-Big Food sentiment, Danone has also been intent on winning over the Big Food activists. In April 2018 it became certified as a B Corp., a designation given to companies that meet rigorous standards of social and environmental performance, accountability and transparency.
Other companies like Nestle , Conagra and Pinnacle Foods are retooling their frozen foods categories, cutting preservatives and adding trendy ingredients like quinoa, popular among young adults. If the shift to healthier foods isn’t enough of an incentive, an activist investor (Daniel Loeb, whose fund Third Point bought a $3.4 billion stake in Nestle in 2017) has been urging the company to sell off other products (such as ice cream and frozen pizza) that don’t fit a “healthy” food portfolio.
More Big Food executives must adopt the right worldview – one that embraces consumers’ hunger for much healthier but still tasty foods, and stop viewing health advocates and shareholder activists alike as their sworn enemies. Only then will they be able to drive the concerted initiatives that will make their products attractive once again for tomorrow’s consumer.