Leading CPG companies are like huge ships that cannot change course quickly enough to address evolving consumer trends, claims the boss of Boulder Brands (which owns the Udi’s Gluten-Free, Earth Balance and EVOL brands). But unless they make some bold strategic decisions now, they face retail ‘Armageddon’.
Speaking on the firm’s second quarter earnings call, CEO Steve Hughes said that in the US frozen food category, for example, retailers had witnessed a “complete implosion of the legacy brands” that had historically driven growth and innovation in the category.
“Healthy Choice, Weight Watchers, Lean Cuisine, are all down systematically… They [retailers] have got all this expensive space and a declining business. So they're ready to shift to emergent natural brands that can provide a complete solution.”
What you're looking at the next three years in the food industry is Armageddon
EVOL, a small but rapidly-growing frozen food brand which Boulder Brands acquired in December 2013, had picked up some significant new business in recent months because it appealed to a new generation of frozen food consumers, he added:
“They [retailers] are going to cut space to these legacy brands and … they're going to lean in on an emerging brand like EVOL… I think it's going to be really remarkable what happens in the next three years in the transition of mainstream grocery. I think you're going to see much more fundamental changes now because the retailers are taking action.
“I really think what you're looking at the next three years in the food industry is Armageddon. If you are a large-cap legacy-branded company, you're on the wrong side of history…”
This non-GMO thing has been a tripwire for large-cap food businesses
Take GM crops. While big food companies may win the legal battle over GMO labeling, they are not winning the hearts and minds of influential consumer groups, said Hughes, who recently made a commitment to sourcing non-GMO ingredients in his firm’s Smart Balance products.
And while simply going non-GMO is not going to transform the fortunes of any brand, the move at Smart Balance was about setting a strategic course in line with where consumers are going, he argued.
“This non-GMO thing has been a tripwire for the entire mainstream, large-caps’ food businesses… Partnering with Monsanto and DuPont to try to beat back these labelling initiatives… I think it raises the fundamental question consumers are now asking, what the hell is in my food?
“I mean if these large CPG companies are partnering with Monsanto and DuPont, to keep off the label, [things] that they know I want to have on the label, that doesn't build a lot of trust in those legacy brands.
“And I think that's one of the things that's feeding them, their declines and thus, feeding the focus of the large retailers to go whole food… to go to natural foods. I mean, I think it's got to bode pretty well for White Wave, Annie's, Hain Celestial, and for us, because there aren't that many large players for these large retailers to partner with.”
Mainstream brands are not connecting with Millennials and Millennial moms
He told FoodNavigator-USA: "Consumers are beginning to demand more transparency about what is in their food, and the GMO issue is one example of that. Mainstream brands are not connecting with millennials and millennial moms who are forming brand preferences in the natural channel.
"We are seeing growth in the conventional grocery channel driven by brands crossing over from the natural channel, and in turn, large mainstream brands may continue to struggle."
EVOL: I've never seen anything quite like what's happened at Target for a new brand
EVOL generated sales of more than $10m in the second quarter from its burritos, skillet meals, quesadillas and breakfast sandwiches compared with $17m for the whole of the previous year, as big names including Target started to give it some serious shelf space, he said.
Indeed, EVOL is already the #10 brand out of 100+ frozen food brands stocked at Target, he revealed. “I've never seen anything quite like what's happened at Target for a new brand.”
Before EVOL emerged, he claimed, “the only real ‘natural’ brand of scale was Amy's. It's a $500m brand, a terrific brand, but it's a vegetarian-based brand. So what we're doing is offering a comprehensive complement with [meat] protein, EVOL, which is pure and simple, and Udi's, which is gluten-free.”
Gluten-Free: The bakery is where people buy baked goods, not the frozen food aisle
The Udi’s Gluten-Free brand also performed well in the quarter, and would be launching with two national restaurant chains in the second half of the year, said Hughes, who described the development as the “tip of the iceberg” when it came to gluten-free growth opportunities in foodservice.
“We're probably engaged with 10 other major food service chains across all formats in some level of conversation or development.”
Meanwhile, several retailers had agreed to take on a new range of Udi’s gluten-free products that would be supplied frozen and cooked in their in-store bakeries, he said.
“Initial consumer reactions have been excellent, and we expect to start shipping to several of our top 10 customers in Q3… It turns off the rack in one or two days, and the consumer has seven days at home with the product.”
Cupcakes and other products are also being tested, he said.
“I think there's going to be a really big, incremental play for us, and it's going to secure Udi's long-term leadership position because at the end of the day, the bakery is where people buy baked goods, not the frozen food aisle.”
In the quarter ended June 30, Boulder Brands' net sales rose 18.7% to $131.3m, driven by a strong performance from Udi's Gluten-Free (+34% year-on-year), EVOL (+131%), and Earth Balance (+18%), that was partially offset by declines in Smart Balance branded spreads and grocery products.
Adjusted EBITDA was flat at $17.6m for the quarter, in line with expectations, which had factored in surging egg white costs.
While Boulder Brands has a strong foothold in some fast-growing categories, however, one analyst told FoodNavigator-USA that the firm was not delivering for investors, adding that "Boulder earned 10 cents per share total over the last 4 quarters. That compares to 11 cents the previous 4 quarters and 12 cents the 4 quarters before that. That’s pathetically little."