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CPG's biggest guns are at a crossroads, says Rabobank: But can blue sky innovation rejuvenate gum, cereals and diet soda?

By Elaine WATSON , 18-Feb-2014
Last updated on 18-Feb-2014 at 16:37 GMT

Can huge - but declining - categories such as diet soda, gum and breakfast cereal be rejuvenated via blue sky innovation, or are in a state of terminal decline?
Can huge - but declining - categories such as diet soda, gum and breakfast cereal be rejuvenated via blue sky innovation, or are in a state of terminal decline?

As CPG’s big guns congregate in Florida for the Consumer Analyst Group of New York (CAGNY) conference, many of them are at a strategic crossroads, says Rabobank. 

Speaking to FoodNavigator-USA before the conference began last night, Rabobank global senior analyst Nicholas Fereday said leading CPG companies are already making major strategic changes in order to reduce their exposure to stagnant or declining categories and gain a stronger foothold in faster-growing categories and markets.

But the process is painfully slow, and many are finding it hard to steer juggernauts that have generated handsome returns for decades in a new direction, he said.

“Many food companies are still too heavily invested in the slow growing US market relative to faster emerging markets or are too capitalized in the wrong food categories (soup, cereal, chewing gum) and not in the growth areas of packaged fresh, private label, chocolate & candy and snacks (healthy or otherwise).”

Are some categories in terminal decline, or can firms turn things around with innovation?

And what is not clear is whether huge - but declining - categories such as gum, diet soda and breakfast cereal can be rejuvenated via blue sky innovation, or if they are in a state of terminal decline, he said.

Take the $4bn US gum market, which is down 20% in volume terms and 10% in sales in the past five years. 

Are sales down because young adults (the heaviest users) are buying less gum to save cash, or are they down because teenagers are just losing interest in gum, period, and eating mints instead (while gum sales have slumped, the US mint market has grown at a CAGR of 4% over 2008-13 to reach $1.2bn)?

Could new more 'natural' products revitalize the category (a question also being asked in the diet soda market), or should firms stop trying to flog a dead donkey?

Manufacturers’ biggest fear, said Fereday, is "that we may be witnessing a cultural shift where chewing gum is no longer viewed as cool”.

Is manufacturing really a core competency for brand owners?

Kellogg has been rationalizing its manufacturing base

Meanwhile, many of the biggest hitters in other struggling categories such as ready-to-eat cereals are dealing with overcapacity - and are responding by closing plants, trying to boost volumes through more aggressive pricing, or moving into co-packing and/or private label manufacture, he said.

“But really, the bigger question is, ‘Should food companies be so invested in manufacturing at all?’ Many other consumer good centric (non-food) companies focus their skills on branding and marketing and leave the cooking to nimbler outfits that can cater more easily to changing consumer trends. Why should food companies be any different?”

Cutting ad spend in response to declining sales can sometimes make things worse, not better

Given that chasing after volume with more aggressive pricing can often prove counterproductive - as it can damage brand equity, however, CPG giants also need to think more creatively about how to handle their predicament, he said.

“Most food companies have cut their advertising spend over the last few year in response to declining sales, and this has made matters worse.”

Big brands also need to be better equipped to respond to the demands of consumer activists and bloggers that are harnessing the power of social media to pressure firms into ditching ingredients that they don’t like, from lean finely textured beef to carmine, Yellow #5 and #6, GMOs, brominated vegetable oil, caramel colors or azodicarbonamide, he added.

“Brands beware! After these successes, expect more, oftentimes irrational, attacks on brands.”

Transparency is key

JM Smucker: "We faced a competitor that was dealing extensively to levels that were unprofitable for us and we chose not to meet them."

They also need to recognize that transparency is key given that consumers now have the power to turn a minor incident into a global PR nightmare within minutes, he observed.

“In a world where folk can take pictures or videos on their cell phones, any incident, such as downer cows entering the food chain or folk goofing off in the kitchens of a fast food chain can easily become the next viral sensation on You Tube or Facebook.”

His comments came as Campbell Soup reported a ‘weaker than expected’ January; Smucker posted disappointing results in peanut butter and fruit spreads as rivals priced products more aggressively and consumers turned away from artificially-sweetened products; and Pepsi reporting continued weakness in carbonated soft drinks.

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