Big Food, small ideas: What ails large U.S. food manufacturers
Campbell Soup Co. is under pressure to shake up its business mix or even sell out entirely, but the Camden company's problems are endemic to an industry that has struggled for years to increase revenue. Campbell is scheduled on Thursday to disclose the results of a strategic review.
The food-industry spotlight will be on Campbell Soup Co. this week as the company unveils the results of a top-to-bottom business review launched in May after chief executive Denise Morrison abruptly retired.
A string of acquisition missteps under Morrison, including her plans to establish a beachhead in fresh food that faltered, and the unremitting decline of its still highly profitable canned soup business have knocked the Camden company out of Wall Street's favor.
But, the 149-year-old company's core problem — lack of revenue growth from existing brands — is shared by most large packaged-food companies. In total, revenues at 10 of the nation's biggest publicly traded packaged-food and beverage companies have fallen by about 15 percent over the last five years. Last year, only PepsiCo increased revenue, but only by 1 percent.
Experts said the woes of the biggest packaged-food firms run deep, wide, and sometimes in conflicting directions: Food has to be healthier and cleaner, but indulgence is just as important; the evermore important millennial generation remains a riddle; digital commerce has given small firms easier access to consumers, eroding the power of big brands; and the quality of store brands has improved, increasing pressure on the sales and profits of national brands.
Above all, consultants and analysts said, a lack of innovation that resonates with consumers has caused turmoil in a sector that can expect overall revenue to grow only a paltry 1 percent a year.
Solving the combination riddle
"The industry is not creating big ideas like it used to," said Gary Stibel, founder and chief executive of New England Consulting Group. "There are line extensions du jour, but there are no major new innovations. In terms of advertising messaging, the industry has walked away from the big ideas that built brands over decades to short messages that mean very little to anybody."
Instead, the big, historical packaged-food companies, not just Campbell, but also General Mills Inc., Kellogg Co., Conagra Brands Inc., and others, try to buy their way to prosperity. They move into faster-growing categories, try to capture the growth of hot, new brands, or simply merge to cut costs. Too often, as was the case with Campbell's purchase of Bolthouse Farms in 2012, it doesn't work.
"Too many of the acquisitions are of brands that have already reached their plateau and have little growth potential left in them," said Stibel, who started his career in 1970 as a marketing manager at Procter & Gamble.
Then what happens? Management, often new management, starts over, sells businesses, and makes acquisitions to implement a new strategy or simply to regain focus.
If Campbell follows that route and announces a dramatic move Thursday, such as a sale of Bolthouse Farms and other so-called packaged fresh businesses, it wouldn't be the first time a food company ran the risk of whiplash from quickly going into and out of businesses.
Big Food’s growth appetite
Conagra in January 2013 paid $6.8 billion, including debt, for Ralcorp's private-label business, touting the ability of those operations, which make products sold with other retailers' labels on them, to boost Conagra's topline growth rate. Private label was growing twice as fast as branded goods, Conagra said.
Managing its own brands and the nation's largest private-label business proved to be too challenging. In 2016, with a new CEO and under pressure from an activist investor, Conagra sold most of its private-label operations for $2.7 billion and booked a $4.2 billion loss.
In June, Conagra announced another giant deal, agreeing to pay $10.9 billion, including debt, for Pinnacle Foods Inc., a roll-up that includes Mrs. Paul's frozen fish, Vlasic pickles, and Open Pit barbecue sauce, brands that Campbell jettisoned in the 1990s.
In their quest for growth, J.M. Smucker and General Mills have turned to pet food, but even Fido offers no guarantee of growth.
Smucker Co. in 2015 paid $5.8 billion for Big Heart Pet Brands, which includes Meow Mix and Kibbles 'n Bits. It had $2.3 billion in revenue that year. Smucker has already started to take impairment charges on the business because it hasn't met expectations. Since 2016, sales in the unit are down slightly.
General Mills Inc. made an even bigger play for pet food, paying $8 billion in April for Blue Buffalo Pet Products Inc., a maker of natural products.
Small deals are also popular, with good reason. An estimated $15 billion in packaged-food sales shifted to companies with less than $1 billion in annual revenue from 2012 through 2017, according to IRI, a Chicago-based research firm. Digital marketing and e-commerce have made it easier for small brands to build a business that becomes attractive to giants.
Kellogg Co. last October paid $600 million for Chicago Bar Co. LLC, maker of Rxbar, which had been founded just five years earlier and was expected to have $120 million in annual sales in the crowded, $5 billion snack-bar market. Rxbar touts "clean" labels that display a short list of ingredients on the front of the package.
During an Aug. 2 earnings conference call, Citi Research analyst David Driscoll raised the obvious question, given how quickly Rxbar had made itself worth $600 million to Kellogg. "I think some people have launched similar products," Driscoll said. "How do you defend the business?"
Before acknowledging the existence of Rxbar imitators, Kellogg chief executive Steven A. Cahillane touted strong growth by Pringles potato chips and Rice Krispies Treats. The latter were so "on fire" that Kellogg could not keep up with demand.
Like others in Big Food, Kellogg contends with the concurrent consumer demands for junk and healthier food. While junk food did well for Kellogg (though Cahillane called Rice Krispies Treats a "wholesome" snack), the company's staple breakfast cereals were still declining. "History shows that it needs more and better health and wellness innovation and communication to get back into growth," Cahillane said.
But even healthier options don't always meet sales expectations.
What can Big Food cook up?
Gerry Shreiber, founder and longtime CEO of J&J Snack Foods Corp. in Pennsauken, said it is true that food companies have to offer healthy or "better for you" products. "But, it doesn't work as well as people thought."
There's a gap between the food being "good for you" and the ability of the food to "satisfy inner taste buds," Shreiber said.
So, where should Big Food turn?
Eddie Yoon, an independent consultant in Chicago, said the industry needs to look for the sort of landmark technological innovation the Campbell's condensed soup was in its day.
Developing an in-home replacement for the microwave, which destroys the quality of food and doesn't heat evenly, would be a good place to start, Yoon said.
"If you had a better way of heating food fast, I think a lot of innovation would follow," he said.