Happy new … challenges! The new year brings with it a bunch of, shall we say, opportunities to move your food or beverage business ahead, or at least not to get left behind.
2018 saw two seemingly far-off topics – cannabis ingredients and cultured meat – brought to the here and now. There also was some serious realignment of the largest companies. In the past, most purchases brought the acquirer into new markets, but several deals toward the end of 2018 saw big companies shedding recent acquisitions that were going nowhere in favor of focusing on their legacy products and markets.
What will 2019 bring? There are a couple of sure things, foremost among them the preparation needed to meet two landmark labeling changes taking effect on Jan. 1, 2020. Those would be the new Nutrition Facts panel, with its call-out of added sugars, and GMO labeling – although now the preferred term is “bioengineered” or BE.
We can’t recall if global trade has ever been in the spotlight before, but it definitely impacted certain segments of the food industry late in 2018 and probably will in 2019. Then there are the recently perennial discussions of transparency, mergers and acquisitions and how Big Food can get its groove back.
So let’s take a look:
New Labels, New Laws
As we said, there are two things every food processor needs to be working on this year: getting new labels ready for the Jan. 1, 2020 deadline for the new Nutrition Facts panel and the bioengineered food disclosure law.
While they once were separate issues – and had enactment deadlines years apart – they’ve been tethered by the two federal food safety agencies. As USDA explained in a guidance on the bioengineered foods regulation, “The proposed compliance date of Jan. 1, 2020, is intended to align with FDA’s … changes to the Nutrition Facts and Supplement Facts label...” Makes perfect sense.
Every food processor we’ve talked to has the new Nutrition Facts panel under control. Processors must modify serving and maybe even package sizes and add a separate listing for “added sugars” – that last point is processors’ biggest fear. Micronutrients Americans need more of – vitamin D, potassium and choline – will be added while some old favorites (vitamins A and C) will disappear. Calorie counts will be in larger, bolder type.
Label Insight (www.labelinsight.com) says it’s already counted 43,049 unique products that were using the new label format as of Dec. 1, 2018.
On the other labeling issue: GMOs, or genetically modified organisms, have been a polarizing issue for years, so maybe the first step is to bury that acronym. Bioengineered or BE is the preferred term from USDA, which has been charged with regulating them. The final rule for bioengineered foods was just published by the Agriculture Dept. in late December with one major deviation from the previous directives: While it sets the “implementation date” at Jan. 1, 2020 for large companies (and Jan. 1, 2021 for small companies), it actually gives food and beverage processors till Jan. 1, 2022 as “the mandatory compliance date.”
It also settles a contentious issue on the side of food and beverage processors: Highly refined ingredients – such as sugar, oils and high-fructose corn syrup – will not force a final product to wear the scarlet letter. Corn, soy and canola are some of the most bioengineered crops, all above 90 percent, and 100 percent of sugar beets are genetically engineered, according to USDA. But processors and ingredient companies argued that trace amounts of genetic material from those crops are eliminated during processing.
Companies have several disclosure options: text, symbol, electronic or digital link, and/or text message. Additional options such as a phone number or web address are available to small food manufacturers or for small and very small packages.
That “electronic or digital link” refers to SmartLabel, the QR code created by Grocery Manufacturers Assn. and Food Marketing Institute. If consumers use a QR code-enabled smartphone, “SmartLabel gives consumers access to more product information than could ever fit on a traditional package label,” GMA says. “Consumers can find out not only what ingredients are included, but also why those ingredients are in the product, what they do and even where they come from. SmartLabel can include detailed descriptions on allergens, usage instructions, information about how the product was produced, how animals were treated during the development process or the product’s environmental impact.”
The final USDA-sanctioned symbols are less Pollyanna-like than the smiley-face and sunshine prototypes floated by the agency early last year. It will be interesting to see if the bioengineered declaration or the call-out of added sugars hurts the sales of any food or beverage product. We’ll be doing mid-year stories on both of those to see.
Cannabis and lab-grown meat
Did you ever think we’d be considering both of those things?
Ready or not, meat is being grown in petri dishes by an increasing number of biotech firms around the globe. And rather than beat ’em, a number of animal protein companies have joined them, in the sense that names like Tyson and Cargill are making equity investments in “cultured meat” companies.
The issue is serious enough and far enough along that USDA and FDA held joint public hearings in November. They decided FDA will oversee cell collection, cell banks and cell growth and differentiation – strong suits for an agency that also oversees drugs. A transition from FDA to USDA oversight will occur during the cell harvest stage. USDA will then oversee the production and labeling of food products derived from the cells of livestock and poultry.
“This regulatory framework will leverage both the FDA’s experience regulating cell-culture technology and living biosystems and the USDA’s expertise in regulating livestock and poultry products for human consumption,” they said.
While we’re on the subject of meat in air quotes, plant-based alternatives appear likely to continue their inroads. The Impossible Burger is showing up on many restaurant menus, often being touted in tabletop tents; even White Castle offers it as a substitute for a Slider.
According to Euromonitor, the analogue meat market grew by 22 percent last year, compared with 2 percent for processed meats. So it’s no surprise that Tyson Foods also spent some money investing in Beyond Meat.
One of these days, the federales may have to come up with similar regulations for cannabis. Slowly, one state here and one state there have legalized recreational use, but the issue really came to the fore when Canada legalized marijuana and its derivatives nationally back on Oct. 17. That set off a steady flow of venture capital from some very respectable companies, most of them in the U.S., into Canadian pot companies.
Here in the U.S., nine states and the District of Columbia already have legalized cannabis’ recreational use. More are considering it. 30 states and DC have legalized it for medical use.
An A.T. Kearney survey says 41 percent of Americans are willing to try recreational cannabis in appropriate foods (such as candy) if it becomes legal. More were interested in foods with cannabis derivatives than in alcoholic or nonalcoholic drinks with the stuff.
Although Canada legalized recreational use back in October, it wasn’t until Dec. 21, 2018, that the government of Canada issued draft regulations for edibles. “Predictions are that this will be a very contentious issue for politicians and the public, as concerns about children having access to THC-infused candies, chocolate and beverages are heightened,” says David Acheson, a former associate commissioner for foods in the FDA and founder and CEO of consultancy The Acheson Group (achesongroup.com).
The leafy green dominoes are likely to fall around the world in 2019. “This global business will explode in 2019,” Acheson continues. “Many countries in Europe and Asia as well as Australia are now opening up for medical use of cannabis. Companies who are getting into these markets early are positioned to expand rapidly. Edibles will be a huge part of this trend and the safety of these products will be under scrutiny, especially if there are food safety or dosage issues with these products.”
Edibles so far seem dominated by small, regional upstarts. The big companies investing in this category are from the beverage category, with heavy representation from beer and alcohol makers. Molson Coors, Constellation Brands and Diageo have invested in or partnered with Canadian marijuana companies to create beverages with about the same mood-altering power as a couple of beers or martinis.
Just before Christmas, AB InBev joined the fray, announcing a partnership with Tilray, a Canadian producer and distributor of cannabis, to research non-alcoholic beverages containing tetrahydrocannabinol (THC) and/or cannabidiol (CBD). The former component gets you high, the latter does not but apparently has some medicinal properties. Each company will kick in US$50 million.
“As consumers in Canada explore THC and CBD-infused products … we look forward to learning more about these beverages and this category in the months ahead,” says Kyle Norrington, president of Labatt Breweries of Canada, the AB InBev subsidiary that is leading the project.
Coca-Cola Co. reportedly is interested in developing a non-intoxicating beverage that would alleviate pain. Several venture capital funds are in or eyeing deals.
It may take a while for national legalization to happen in the U.S., but that seems more likely with each passing day.
Finding the path back to growth
Now more than in recent memory, the big food and beverage companies are under pressure to deliver organic, volume-based topline growth – not just better bottom lines.
Sales at many of the largest companies have been pretty flat since 2014. When sales declined over the next two years, aggressive cost-cutting saved many bottom lines. That strategy appears to have run its course.
The first solution was to make some portfolio-stretching, even audacious, acquisitions. Think ConAgra’s reckless pursuit of Ralcorp’s private label business, Snyder’s-Lance’s purchase of Diamond Foods, Post Holding’s buy of MOM (Malt-O-Meal) Brands, Unilever buying SlimFast. None of those deals worked out. Part of the reason was the ridiculously high multiples paid for firms that were innovative, nichey, but marginally profitable, if at all.
After paying more modest but still high price tags for smaller but stable companies, many of them partially owned by venture capitalists, Big Food companies developed a second strategy: start their own venture capital funds. 301 Inc., formally named by General Mills in 2015, may have been the first, although Coca-Cola and PepsiCo had similar although informal funds in operation. 301 was followed within a year by Campbell Soup (which started Acre Venture Partners), Hain Celestial (Cultivate Ventures), Kellogg (“1894”), Barilla (Blu1877) and Tyson (Tyson New Ventures).
These in-house venture capital programs may pay off, but slowly and in small ways. But shareholders and activist investors want results now. So there is some serious realignment going on among the big food companies.
Danone wants to be the world leader in plant-based foods, and it acquired WhiteWave to move it closer to that goal. Nestle wants to provide health-imparting foods and beverages, so it jettisoned its North American candy business last year. Hershey wants to be a snack food company, not just a candy company, so it bought Amplify Brands, maker of SkinnyPop.
Mars hasn’t abandoned candy, but pet food is now the company’s biggest product category following a string of acquisitions this millennium.
And some are simply divesting, intentionally shrinking themselves into more focused companies, in many cases going back to their roots.
Campbell Soup went off in a number of different tangents under CEO Denise Morrison, but the interim CEO put most of those on the selling block to focus on soup and the North American market. New, permanent CEO Mark Clouse, who just started this month, is expected to continue that strategy.
Like Campbell, Kellogg has new leadership that, like Campbell, is trying to undo recent purchases to focus on breakfast (not just cereal) and the domestic market. Kellogg is shopping its cookie and fruit snack brands, such as Keebler and Famous Amos, to concentrate on core products.
Hain Celestial, too, has endured a couple of difficult years and also has a new CEO. Mark Schiller in October replaced the only CEO the 25-year-old company has had, founder Irwin Simon, and appears poised to sell off underperforming and tangential assets to focus on natural foods.
So, by the end of 2019, some of the top companies will look very different than they have recently, with some looking like they did decades ago.
Stay close to home
With trade wars, global economic uncertainty and souring relations, the world has become an inhospitable place for American food and beverage companies. As a result, some companies are doubling down on domestic sales.
Among the first things Campbell Soup put up for sale was its international business, which included biscuit-makers Kelsen in Europe and Arnott’s in Australia, along with the company’s manufacturing operations in Indonesia and Malaysia and operations in Hong Kong and Japan. In October, Kraft Heinz agreed to sell multiple Indian businesses to Zydus for $628 million. Two years ago, most multinationals wrote off all their assets in Venezuela.
President Donald Trump’s well-publicized tariffs on certain countries’ goods set off retaliatory tariffs on a wide range of U.S. products, including food – both farm commodities and processed food. The immediate effect was to cause commodity prices to drop in the U.S., which is bad for farmers but potentially good for processors – at least in the short term. But if higher-value/more processed U.S. foods are targeted, it won’t be good for Big Food.
Speaking of the home turf, U.S. consumers expect more from their food and beverage companies. More variety, more food safety, more social responsibility, and they’re willing to pay for it. A lot of trendspotters use the term “conscious consumption.” It encompasses personal health, sustainability, authenticity, organic production, animal welfare, a concern for the viability of producers both at home (the local movement) and across the globe (a living wage for cocoa farmers in Ivory Coast). Read more about conscious consumption in our Formulation Trends article.
And all that requires transparency. The term seems to evolve a little, and grows, each year, but clearly indicates people want to know more about their food. Food & beverage companies are bigger and more “corporate” than ever, and consumers are further removed from farms than ever before. The successful companies will work in 2019 to bridge that gap.