Frozen Food Sales' Decline Paves the Way for Fresh Food Innovation

With frozen food sales declining but fresh prepared foods growing, redirect your products from the freezer case toward the deli counter.

By Rene Ouimet, Melanie Schmidt and Dave Donnan; A.T. Kearney

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The frozen food category in past decades established itself as the "fresh" and convenient solution to prepared meals through an expanding combination of product and packaging innovation. However, as consumer perceptions of the freshness and healthfulness of frozen foods wanes and the perceived nutrition and convenience of fresh prepared foods accelerates, the frozen prepared food category is facing a declining future, much in line with the canned foods it displaced decades ago.

How are manufacturers preparing for the ascendancy of "fresh" prepared food? A.T. Kearney, a global management consulting firm, examined the changing consumer perceptions, demographic shifts and responses that are redefining the recipe for success in prepared foods.

Since 1929, when Clarence Birdseye launched his quick-frozen food business, frozen prepared foods offered consumers a practical alternative to canned foods. The introduction of the microwave for home use dramatically accelerated industry growth in the 1980s. The Ice Age took center stage with superior marks on the perceived benefits of convenience, health, freshness, taste and variety. In the 1990s, as consumers embraced healthy eating, frozen food responded with new lifestyle choices.

The very attributes that made frozen foods a successful alternative to canned foods are now more often identified with fresh prepared foods. Consumers gravitate to fresh prepared foods because their environment has not been altered through massive temperature and processing changes. Celebrity chefs and reality cooking shows emphasize fresh ingredients and home cooking. Farmers markets have grown explosively in the past 15 years as consumers have become attracted to fresh and locally grown foods.

Fresh is considered the ultimate, convenient, ready-to-eat solution. Savvy consumers frequent Whole Foods for its fresh, unpackaged take-out and Trader Joe's with its branded, restaurant-quality refrigerated meals.

These perceptions are impacting the frozen food aisle. Frozen prepared meals are in decline, and the significant attempts at innovation have not been able to regain the consumer's top position in terms of quality and convenience. A surprising number of major food companies reported over the past 18 months that they had experienced sustained volume declines in their core businesses. In 2013, units are forecast to decrease by another 3-5 percent… some recent estimates are inching their way up to the double digits.

While investment and accelerated product innovation may slow frozen food erosion in the short term, the accelerating demand for fresh foods will continue to gain share of the consumers' stomachs as shoppers continue to demand what they perceive as healthy and convenient meal solutions in the fresh categories. As consumer perceptions change, two additional factors will define the "fresh age."

1. Millennials Grow as Influential Consumers

By 2020, millennials (the generation born between 1982 and 2001) over 25 will be 19 percent of the population and will significantly impact the food-at-home industry. Millennials are seeking value and convenience in their food, but they increasingly opt for fresher and healthier food.

Millennials, as a whole, are less brand-loyal and are more willing to seek food outside the traditional grocery store. They are not afraid to purchase food online and purchase "food movement" products, such as organic and locally produced products and meal solutions. This increasingly important consumer base spends nearly 50 percent of its food budget on ready-to-eat solutions, such as take-out products and restaurant meals. They buy more frequently and eat immediately vs. the older generations that buy, store and eat later.

Younger shoppers are leaving the frozen food department for other options including some outside the traditional grocery store. As millennials replace baby boomers as the influential consumers of the future, products that are attuned to their preferences and shopping styles will win in the marketplace.

As they move into their peak earning years, millennials will indulge in their preferences for specialty, ethnic, organic, natural and fresh products and put pressure on both large mass market companies and large retailers to keep pace with their preferences and needs.

2. Retailers Respond to the Fresh Age

Retailers have been quick to respond to changing consumer preferences. Some retailers are aggressively increasing their space devoted to fresh -- up to 40 percent in some store designs. They have limited their range of frozen products and reduced space and promotional support.

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