Can little brands save Big Food?

Big Food has big problems. Image courtesy of Dean Hochman

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“Consumers have lost faith in legacy food products” commented Bernstein analyst Alexia Howard in a recent Fortune magazine article on the unprecedented exodus of CEOs from numerous ‘big food’ companies over the last 12 months. Big Food has big problems; can little brands bail the industry out?

It used to a simple formula: create a great product, advertise it like crazy, and watch one generation after another buy it. It was a recipe for printing money which is why the financial community has always revered packaged goods brands.

As investment advisor Ken Fischer commented in a recent piece in USAToday, “I’d get a 50-year old magazine, see what current consumer staples products were advertised way back them, and presume they had perpetual staying power.”

But that ‘perpetual staying power’ may no longer exist. The brands that the Silent Generation and Baby Boomers grew up on do not seem to have the same allure with millennials and younger generations. These younger consumers are no longer flocking to the center of the supermarket like their parents or grandparents did. Big Food’s lock on the ‘center store’ was once its greatest asset; today it is looking more like a liability.

Consumers now view the boxed and canned fare sold in the ‘center store’ as processed food, a pejorative. According to a Q1 2017 GlobalData survey, 50% of Americans (and 41% of consumers globally) say that the term ‘processed’ means food or drink high in preservatives or additives. 40% say it means products high in artificial ingredients and 34% say it means foods that are ‘un-natural.’  This is not where you want to be today.

Yet efforts to strip artificial preservatives and additives from center store food and drink products have failed to save the day. Company after company has announced the elimination of artificial ingredients, expecting sales to improve.

But sales gains have been elusive, and some companies have even had to reverse course. A consumer revolt led General Mills to reintroduce its iconic Trix cereal brand with artificial colours and flavours this month. The company had replaced the old version of Trix with a ‘clean’ version in 2016 without artificial ingredients, but also without the brand’s vibrant colors. General Mills will reportedly sell both versions of Trix, at least for the time being.

A generational disconnect

Part of the problem is a generational disconnect when it comes to creating cleaner, better, more healthful food and drink products. Younger consumers see the ‘clean label’ concept as being engineered from the ground up, while older consumers generally do not.

According to GlobalData’s Q1 2017 consumer survey, 60% of Americans aged 25-34 equate ‘clean label’ with natural or organic products, versus just 25% of 55-64 year olds.  Older generations are more likely to equate the concept with removing artificial ingredients. ‘Cleaning up’ an older brand seems unlikely to connect with younger consumers.

This disconnect may eventually force Big Food to play little food’s game. Launching natural or organic versions of top brands (like G Organic in the case of PepsiCo’s Gatorade sports drink) may not cut it with younger consumers that put craft beer on the map and were reared on folksy, ‘better for you’ offerings from the likes of Whole Foods and Trader Joe’s.

Playing that game means dreaming up new brands from scratch, as some Big Food makers have gone back to recently. General Mills with The Good Table brand entrée mixes, Kraft Heinz with its Devour frozen meal line, and ConAgra Brands with its millennial-focused Wicked Kitchen frozen meal brand are three examples. Or it means buying fast-growing small brands, before they become big brands on their own. Big Food seems to be leaning toward the latter more than the former.

Snapping up smaller brands

Big Food has gone on a small brand shopping spree. In September, ConAgra Brands purchased Angie’s Artisan Treats – the maker of Boomchickapop popcorn – for $250 million. The same month, Nestle purchased Sweet Earth – a maker of vegan meals and snacks – as well as a majority stake in Blue Bottle Coffee for $425 million. Earlier this year, ConAgra acquired Thanasi Brands, parent company of Duke’s Meat and Bigs Seeds, two smaller brands that had been nipping away at ConAgra’s Slim Jim and David brands.

Unilever is taking a similar approach. In April, Unilever snapped up gourmet condiment maker Sir Kensington’s for around $140 million. In September, it purchased organic herbal tea and supplement company Pukka Herbs for an undisclosed sum. In October, Unilever followed that up with the purchase of Mãe Terra, a Brazilian natural and organic food business, again for an undisclosed sum.

Big Food may be reaching a consensus that buying little brands is a better strategy than creating new brands from scratch.

Campbell Soup Company seems to be on-board with this strategy, spending $700 million to acquire organic soup maker Pacific Foods in July. Kellogg Company just spent $600 million to purchase Chicago Bar Company, the maker of Rxbar. The protein bar is made with whole food ingredients and is claimed to be the fastest growing nutrition bar brand in the US.

Whether purchases like this can have a material difference on Big Food’s bottom line remains to be seen. According to Kellogg, Rxbar’s sales are expected to hit $120 million in 2017. As impressive as that sounds, $120 million is almost a rounding error when you are talking about a company with sales in excess of $13 billion in 2016.

While it may be premature to declare big brands dead and put Big Food on life support, this recent rash of acquisitions is likely to continue, if for no other reason than it leverages what Big Food does best. Nobody knows the ins-and-outs of product distribution like Big Food. And nobody leverages economies-of-scale like Big Food.

But Big Food may be overpaying for little food at what may (in time) prove to be outrageous prices. $250 million may prove to be a huge price to pay for a niche company like Angie’s Artisan Treats that has gone through three owners since 2011. Behavior like this has a tech bubble feel to it.

But when you are starved for growth, behavior like this can look reasonable. According to A.T. Kearney, the 25 largest food and beverage companies averaged just 2% annual sales growth from 2012 to 2016, while smaller companies collectively had three times the growth rate over the same period. No wonder Big Food is spending big money on little food.

Big Food is also buying little food companies much earlier in their gestation cycle, well before these companies have proven that they have staying power. When General Mills purchased Epic Provisions in 2016, the company had been around just two years. In the past, it was more normal for Big Food companies to wait five, 10, or 15 years before acquiring startup brands and companies.

It is also not clear if little food brands can maintain the cachet that made them hits after they have been purchased by Big Food companies. Will consumers regard them as sellouts and move on to newer brands?

Self-created brands may be the long-term answer for Big Food which literally became big by creating new brands from scratch. Did the industry forget how to do that? Maybe it is time to create a new generation of brands that can grow up into the winners and growth champions of the future. Trying to buy prosperity is a risky strategy; sometimes you need to create it from scratch.