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.
Two 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.
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).
General Mills already had amassed a sizable natural and organic portfolio but didn't get much credit until its 2014 purchase of Annie's (Homegrown). Gen X and Y mothers gave the small brand a healthy halo, which General Mills has stretched over lines of yogurt, cereal, even pizza poppers, all categories in which General Mills already had manufacturing capacity. Now, Big G's nine organic brands account for $1 billion in sales, and that number is expected to hit $1.5 billion by 2020.
Hershey, another chocolate-heavy candy company, made just two small candy acquisitions this millennium. But in 2015, it acquired Krave Jerky, marking its first foray outside of the confectionery market in more than a decade. And last year it bought Amplify Snack Brands, which includes the meteoric popcorn brand Skinny Pop and other salty snacks.
McCormick's biggest-ever acquisition was not another spice company but Reckitt Benckiser’s Food Division (RB Foods), which makes Frank’s RedHot sauce, French’s Mustard, Cattlemen's barbecue sauce and a handful of other brands. Overnight last July, McCormick became a leader in the U.S. condiments category.
Kellogg and Campbell Soup are several years into transformations, but each still relies on its legacy products. Now, more than half of Kellogg's revenues are from "snacking" not cereal. And with the Snyder's-Lance acquisition just completed, snacks will surpass soups in revenue this year at Campbell — which also has significant stakes in organic baby foods (Plum), premium juices and now nondairy milk (Bolthouse Farms) and salsa and hummus (Garden Fresh Gourmet).
So the transformations are well under way. In a few years, the names of the leading food and beverage companies may be the same, but their product lines likely will be very different.
Little bets on little niches
One of the problems Lash of Morningstar points out is the painfully long timeline of the big-company product development cycle. "While all of them are working on it, they haven't been able to reduce concept-to-shelf times. And this at a time when consumer trends are moving so fast. Smaller companies really are more agile. That's one reason why big companies are pursuing niche players."
A relatively new method for investigating new channels and new companies has been the venture capital fund. Formerly the domain of private investors, the first formal food company fund may have been 301 Inc., unveiled by General Mills in 2015 -- although it had been operating in some ways for three years. Coca-Cola and PepsiCo had similar although informal funds in operation as long.
Within a year after General Mill's announcement, almost every big, diversified food company created its own. Campbell Soup started Acre Venture Partners; Hain Celestial's is Cultivate Ventures; Kellogg named its fund "1894"; Barilla launched Blu1877; Tyson's is just Tyson Ventures.
Chobani has gone the incubator route, for three years now choosing a half dozen startups to mentor and lend the Greek yogurt company's considerable resources – but not to buy into them.
For the venture capital funds, the goals are the same: to take investment stakes in small, early-stage, often regional startups that are looking for capital to grow. Their products usually are far afield from those of their investor. Both General Mills and Tyson have invested in plant-based food maker Beyond Meat. Tyson Ventures also bought into Memphis Meats, which is developing cultured meat. Kellogg bought into MycoTechnology, which creates taste modifiers from mushrooms. Hain Celestial's first investment was in The Better Bean Co.
"We have found that more and more innovation was coming from small companies," John Haugen, vice president and general manager of 301 Inc. said at the General Mills fund's launch. "There were ways for us to partner and provide growth capital."
Haugen said 301 Inc. will look for three considerations as a venture capitalist. First, making sure that any investment provides a genuine opportunity to compete in new categories. Second, communicating the financial metrics and goals that come with the investment. Third, arranging the deal so General Mills can buy the startup down the road.
None of the investments has transformed the acquiring company yet -- but it's only been three years.
When all else fails, change your CEO. In the food and beverage industry, chief executives have been dropping like flies lately. CEOs have been replaced at nine of the 24 largest U.S. companies since Jan. 1, 2017. But that's not the case across business and industry.
Across all industries, CEOs average an age of 58 years and tenure of eight years. according to a 2016 study by Korn Ferry International. The executive search firm doesn't have numbers specific to the food industry, but food CEOS seem to be turning over faster than in other categories, notes John Challenger, CEO of Chicago outplacement firm Challenger, Gray & Christmas (www.challengergray.com).
"It's kind of like the [U.S.] presidency – you'll certainly get one four-year term and if you're lucky you'll get a second one, but that's it," says Challenger.
"I really think we are in a watershed period. There's so much change going on, the whole world is changing. There's a greater need to respond to consumers. When all that's not working for a company, the CEO in some ways becomes the scapegoat."
It used to be, the CEO was the best man to manage a large and stable but growing company, he said. Now, as ever, changing the CEO can be the quickest way to change an entire organization.
"Many companies are not so stable anymore. The rules have changed. Now leading a company requires a different skill set," Challenger adds.
"Especially in the food industry, consumers are exerting more pressure than ever before. And there are pressures from shareholders, stakeholders, the communities they work in, government, their suppliers and their retailers. Of course, CEOs are the types of people who can handle pressure. But these are unprecedented pressures."
When your company's biggest bugaboos are millennial consumers, e-commerce and emerging technology, maybe a 60-something guy is not the best leader anymore.
While there have been some abrupt leadership changes in the past year or so, Lash cautioned that not all the replacements resulted from dissatisfaction with the current course. "Several of the outgoing CEOs had seven, even 10 years in that role, and were in their 60s," she notes. While newcomers like Cahillane and Van de Put came from outside their new companies, to some extent outside the CPG category, ones like Harmening, Buck and Quincey were groomed within their companies. Hayes came to Tyson via the recent Hillshire acquisition.
Who are these new change agents we should be watching? Check out part 2 of our cover article: Seven CEOs to Watch in Food and Beverage