Market View: The Era of Fat and Happy Is Over

June 23, 2015
The era of renewed innovation must begin in earnest.

The late Malcolm Forbes said, "The greatest obstacle to business is success," and for most of the past the food industry has been successful. However two things are taking place that are likely to have a negative impact on the industry if some major changes are not made.

The first is innovation. It appears the major food companies have eschewed risk by letting entrepreneurs start food businesses; then the big companies buy the fledgling businesses. This is less risky but it is also less likely to produce long term profit and growth.

Yet history shows that, in at least half of all cases, after the deal closes the acquisitions sour. There are dozens of studies and papers and estimates of how many M&A deals fail to meet financial expectations. This can run from 50 percent to as high as 90 percent according to Jim Price of the University of Michigan.

A major cause of the failure of acquisitions is the inability to integrate the new business into the existing one. The irony is that a big food company buys the innovative company and, being the bigger company, it tries to integrate the innovative company into the policies and procedures of the behemoth. There is a clash of cultures in which the giant usually wins … and subsequent new products fail to live up to expectations.

The real losers are the big brands. A recent Advertising Age headline proclaimed: “Big Food's Big Problem: Consumers Don't Trust Brands.”

Another cause of failure is the new consumer being aware that the product that they fell in love with was absorbed by a big food company. Campbell Soup Co. CEO Denise Morrison recently recognized that "we are well aware of the mounting distrust of Big Food. We understand that increasing numbers of consumers are seeking authentic, genuine food experiences and we know that they are skeptical of the ability of large, long-established food companies to deliver them."

A lack of innovation has led to our favorite brands turning over to others the discovery and creation of the products consumers really want … while the big companies try to find a new flavor for an old product. This is not what made our heritage food companies great.

The second thing is the failure to recognize major changes in the way consumers are buying food. Most major food processors are wedded to the traditional distribution channel: supermarkets and hypermarkets. They do everything humanly possible to get on the shelves of these stores including kowtowing to every financial request that is made. Now let me be clear, I don't begrudge the supermarkets, they should ask for all they can. If food processors capitulate that is their business.

There are so many emerging channels of distribution that are being ignored by food processors. For example Amazon added 10 million new Prime customers and 60 percent were first-time buyers this Christmas. I have already written about emerging channels of distribution so I won't repeat all the options.

Regardless of the reason, the lack of innovation has led to a reduction in margins and a failure to remain attractive to the new consumers. Innovation is a lot more than a line extension or a new package design.

Ironically, reducing the efforts to be innovative was meant to cut costs and increase margins. It may have worked in the short term but many of our legacy food companies are suffering today because of cost-cutting decisions made years ago especially in the area of innovation.

I am reminded of a CEO who came to his board of directors with a plan to make the company a leader in the category in the near future. He had a growth plan in which innovation was the primary success vehicle. He did tell the board that to get to a profitable point, the company would sustain some low profits until the changes "kicked in." He was fired!

The next CEO sold off almost everything of value, drove up the share price and then left the firm. Guess what? That company is now struggling.

To paraphrase the late Peter Drucker, there are only two functions of a firm: marketing and innovation. He didn't say a marketing department but a whole company dedicated to finding out what consumers want and giving it to them. By innovation he didn't mean just the research department. He meant a commitment to the overall direction of the company being focused on future needs as well as current ones.

If our legacy food processors are going to be viable in the future, they will have to be more focused on the future: future consumers, future channels of distribution and future employees. The era of fat and happy is over; the era of renewed innovation must begin in earnest.

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