Major U.S. food and beverage companies are experiencing anemic volumetric growth, according to The Hartman Group’s analysis of Euromonitor data. It revealed that from 2012 to 2013, more than half of the top 14 branded food and beverage companies grew their U.S. retail revenue slower than 1 percent inflation.
The implications are troubling for those at the helm of food and beverage companies with large exposure to the U.S. retail food market:
- Demand is tapping out for many legacy branded food products, as these businesses can no longer count on population growth as a basic guarantor of top-line growth.
- Innovation from many legacy brands continues to produce short-lived top-line hits, not sustained and/or large accretions.
- Innovation successes (i.e., large first-year hits) are not necessarily making up for volume losses elsewhere.
- Brand portfolios are becoming segregated into decliners, flatliners and a small group of power brands, creating turf struggles over marketing/innovation investments
During three days of sessions at IRI’s recent “Winning the Race to Growth” summit in Orlando, ironically, the mood seemed fairly upbeat, despite the unimpressive performance of the industry. The default assumption at the summit was that the industry’s problems are related to macroeconomics, stale go-to-market strategies and/or inefficient marketing/promotions.
In other words, the reasoning is that everything will be solved when GDP picks up and when companies use better data to plug distribution holes and reach consumers with better targeted digital promotions.
The Hartman Group has a different theory: It’s about the food.
In three days of conferencing, rarely did the subject of product or product design come up as part of the recipe for growth. That’s mystifying, given the relentless double-digit growth of disruptive upmarket food retailers that sell highly differentiated foods curated to a contemporary set of quality criteria. Even the management consultants on hand commented on the market-share growth of small brands.
The biggest long-term challenge facing the U.S. food industry is that taste preferences are changing. This is most apparent among highly urbane and educated consumers, where the arbitrary boundaries of “too sweet” and “too fatty” are altering in ways inimical to the core food science paradigm of the U.S. food and beverage industry.
The U.S. food industry routinely serves crude flavor profiles associated with the unsophisticated farm cuisine of Middle America: heavy on salt, dairy and animal fat and, in the past half century, sugar. Fattiness. Sweetness. Saltiness. These are the primary flavor triggers the American food industry knows how to engineer and incorporate into branded processed foods. And it is very, very good at it. For years, there was growing demand for these flavors in all sorts of foods, primarily because U.S. preferences were not changing.
Now they are. The increasing multiculturalism of the U.S. population plus the globally well-traveled, savvy upper-middle class have created a large population of consumers intentionally seeking complex flavor profiles imported from much more sophisticated food cultures.
In addition, overconsumption of traditional fatty and sweet foods became associated with rapidly rising rates of obesity, heart disease and diabetes. More educated or health-conscious consumers are readjusting their boundaries around fattiness, saltiness and sweetness, especially the latter. Subtle sweetness, targeted saltiness and moderate fattiness are now spreading as the new norm for modern U.S. consumers. While new preferences will not eliminate our desire for the "old stuff," these recalibrations are capping growth in many legacy brands that cannot simply reformulate to the new taste profiles without losing their brand identity (e.g., low-fat, low-sodium Cheetos?).
A perplexing twist is that upmarket consumers are simultaneously driving growth in high-fat-content categories such as olive oil and high-sweetness categories such as honey. The apparent contradiction is part of the complexity of upmarket shifts in food culture. Unprocessed sources of fattiness and sweetness are allowed a backdoor pass. It’s a cultural truth that’s hard for mainstream brands to act on, because these kinds of natural, pure sources of fat and sugar lose their acceptability halo once transformed into heavily processed foods.
The shift from a traditional, all-American diet based on crude flavor profiles to a multicultural one that includes subtle, global flavor profiles is naturally leading consumers to new foods (e.g., Greek yogurt, hummus) and to the emerging brands that herald their arrival.
As U.S. food preferences have changed, large industry players have been slow to react. The tendency is to use marketing, trade promotions, big data and digital media to plug the leaky bucket. But we are confident the industry can catch up with consumers.
Here’s our take on how senior executives should respond:
- Battle big for growth categories, not just for existing category share. Many legacy brands face a much bigger problem than the age of their brand or its “relevancy.” They are competing for share of declining categories in food culture (Hint: Don’t invest in Worcestershire sauce).
Yet, out of a sample of nearly 300 product launches from top food companies followed by The Hartman Group since 2012, less than 1 percent involved food categories introduced recently (i.e., in the past 20 years) to Americans. The inability of major packaged food companies to broaden their view of where to grow in the store continues to benefit their retail partners, innovative supply-chain companies and entrepreneurs.