Big Food's Focus Is Now on Growth

After years of shrinking sales, cost-cutting and a raft of new CEOs, large food and beverage companies look for ways to increase the top line.

By Dave Fusaro, Editor in Chief

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These are trying times to be a big food and beverage company. Consumer sentiments seem to change like the wind ("Do they want aspartame or not?"), ecommerce is changing the way we've done business for the past hundred years and activist investors want either better returns or to auction off the company in pieces.

In our own analysis, eight of the 25 largest U.S. companies had sales declines for at least the past three years in a row. And most if not all of them made acquisitions during that time, which should have propped up sales.

FP1804 Chart Top 100 RankTwo more – No. 1 PepsiCo and No. 17 Dean Foods – recorded small sales increases in 2017 after at least two consecutive years of decline.

When we did a mega-analysis of our own Top 100© list in 2016 (based on 2015 sales), we found:

  • 21 of top 30 companies had sales declines (only 8 increased).
  • Adding up all 100 companies, there was an aggregate 2.2 percent loss in sales.
  • Altogether, $1.7 billion in sales had disappeared from these bigger food companies.

The first year sales declined for most companies, so did net income. The second year, these top food and beverage companies were prepared: They already had instituted cost-cutting, some of it aggressive, and profits rebounded. "But you can't cut your way to topline growth," says Erin Lash, director of consumer equity research at Morningstar Research Services (www.morningstar.com).

"Now we're going to put the same emphasis on topline growth that we previously put on cost control," Steve Cahillane, Kellogg's new CEO, said at the February Consumer Analyst Group of New York (CAGNY) meeting. "The most important thing we can do is to return the company to topline growth."

Lash cautions that some of that shrinkage has been intentional. "Many companies sold off brands and SKUs that were not growing, long-term strategic nor profitable – and that's a good thing." Nevertheless, she admits, they're now refocusing on growth.

Companies may have different strategies for recapturing that growth, but many are following three general paths: transformational acquisitions, buying into niches and replacement of the CEO.

Cahillane, for example, was speaking during his fifth month on the job, having somewhat abruptly replaced John Bryant as Kellogg's CEO. Although they had slightly more seniority than him, first-time CAGNY speakers this February included Dirk Van de Put of Mondelez, Gary Tickle of Hain Celestial and Michele Buck of Hershey (CEOs James Quincey of Coca-Cola and Jeff Harmening of General Mills spoke last year as COOs). That's more "freshmen" than CAGNY has seen in a long time, maybe ever.

Transformational acquisitions

Acquisitions and divestitures are a regular part of the business. Past buying and selling usually meant a bolt-on acquisition that just tweaked a company, adding an organic or specialty brand in a category in which the acquiring company already was active. Now increasingly the purchases are transformational, making the buyer an overnight leader in a category it never tried before.

Consider Nestle and Mars: Many consumers think of them as candy companies, especially in the chocolate niche of that category. But Nestle, long a player in a multitude of food and beverage categories around the globe, just completed the sale of its entire candy portfolio in the U.S. to Ferrero Group.

Where does that leave Nestle? In addition to frozen entrees, ice cream and baby food, the Swiss company is the leading bottled water supplier in the U.S. and the No. 2 global seller of pet foods, boasting brand such as Purina, Friskies, Alpo and Beneful.

Who's No. 1 in pet foods? Unlike Nestle, Mars Inc. hasn't retreated from candy, but a string of acquisitions this millennium now make pet food its biggest product category. Analysts estimate global sales exceed $12 billion for brands such as Iams, Pedigree, Whiskas, Nutro and Royal Canin.

The Nos. 3 and 4 pet food companies are owned by Colgate-Palmolive and J.M. Smucker, respectively, and General Mills is in the process of buying No. 5 Blue Buffalo. High-end pet food is a prime growth category.

General Mills is an interesting study. Aside from its legacy cereals (which have been perennial disappointments) there are few products left that appear to come from "mills," general or otherwise. Snacks now outsell cereals (21 percent to 17 percent, with "convenient meals" also at 17 percent). Gone is most of what came with Pillsbury, including Green Giant (which apparently is doing nicely for B&G Foods).

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