“Large food and beverage manufacturers have spent more than average on trade promotions, while smaller operators have kept promotions relatively low,” says Nielsen in a recent analysis that breaks down performance according to company size.
“In the year ended April 29, 2017, sales sold on promotion accounted for 40% of large manufacturers’ dollar volume, compared with just 27% of small manufacturers’ dollar volume.
“Smaller manufacturers are also winning with premium price tiers. In the year ended April 29, 2017, premium-priced sales accounted for 44% of small manufacturers’ sales (compared to large manufacturers’ premium price sales at 32%; middle at 39% and private-label at 17%).
“Over the same period, small manufacturers sold the highest share of clean label products when compared to their conventional sales (40% vs. 60%, respectively) than large manufacturers (24% vs. 76%), middle-sized manufacturers (38% vs. 62%) and private-label manufacturers (27% vs. 73%).”
Small companies are driving growth
As for growth, says Nielsen, it’s been driven by smaller companies: “Today, the smallest manufacturers, nearly 16,000 companies, account for 19% of dollar sales and are driving more than half of the [dollar sales] growth (53%).”
Small- and medium-sized manufacturers have also increased their distribution across regions, adds Nielsen. “For approximately 900 food and beverage items that have been added to the shelves since 2013, 88% came from small- and medium-sized companies. For example, small manufacturers’ products that may have previously only existed in six markets now exists in 10 or more, indicating that retailers across markets are giving them more shelf space.”
'Retailers are more resistant than usual to attempts to raise prices'
In short, big packaged food brands, suggests Rabobank senior analyst Nicholas Fereday, are in a bit of a funk, “wrestling with flat to negative growth in the face of changing consumer tastes towards fresher options and the challenge from a whole host of social media-savvy emerging packaged food brands.”
To add to the misery, they are also dealing with the 17th consecutive month of falling supermarket food prices, adds Fereday in a recent analysis ** of CPG market trends, in which he notes that “retailers are more resistant than usual to attempts to raise prices.”
And things are unlikely to get much easier anytime soon, he predicts: “According to Rabobank’s latest agri-commodity markets research, the short-term outlook for prices for many agricultural commodities over the next twelve months remains a mixed bag with wheat and corn forecast to rise but remain well below the highs of previous years, with soybean, palm oil and sugar flat. In aggregate, this suggests only modest price inflation can be expected at best.”
Nick Fereday: 'It may be a challenge to maintain prices, let alone raise them, in the current climate'
And retailers, he observes, are “agnostic to the plight of Big Food.” If legacy brands are not selling, then they can simply allocate more space to private label and/or newer emerging brands, coupled with more space for fresh and prepared meals.
“In such an environment,” he points out, “it may be a challenge to maintain prices, let alone raise them.”
Light at the end of the deflationary tunnel?
Many retailers are also deliberately lowering prices to increase store traffic, he adds, predicting that for the next 12 to 18 months, “we expect to see a continuation of 'Ever Lower Prices' as a deliberate retail strategy and this will put a number of retailers under pressure, leading to opportunities for further consolidation.”
Greg Wank: Early CPG investing is changing the investment landscape completely
So what can big CPG players do in this environment?
The one thing they are all doing - aside from trying to be as efficient as possible - is re-engineer their portfolios, says Greg Wank, leader of the food and beverage industry practice at accounting and advisory firm Anchin.
"I think packaged food companies like Campbell's understand that they have got to do something because they are so far behind where the consumer is heading, so they saw the writing on the wall and they are doing something about it [investing in fresh prepared food, setting up a venture arm to invest in innovative brands, exploring e-commerce opportunities, tapping into meal delivery and personalized nutrition via investments in Chef'd and Habit]."
In the case of Kraft Heinz, this might mean doing another mega-deal, whereas for Campbell Soup and others this might mean spreading their bets by continuing to buy and invest in innovative smaller brands, he says.
“With the private equity firms, it used to be a case of, I need to build a great relationship with PepsiCo and Hershey because they will buy this [emerging brand] from me in a few years,” Wank tells FoodNavigator-USA.
“But now they [private equity players] are competing with these [CPG] companies and it’s changing the investor landscape completely, which benefits emerging brands, as there are more potential stakeholders at an earlier stage than there have ever been, and they are value-added stakeholders [who can provide more than just cash].”
Vita Coco deal would give PepsiCo a leadership position in a fast-growing market overnight
As for larger acquisition targets in the natural and organic sector, there are not so many obvious players to choose from, and as a consequence, those that have changed hands recently [Bai Brands, Annie’s] have come with some fairly eye-watering price tags, he says.
But there are clear advantages to buying some more established brands, he notes, pointing out that Vita Coco - for example - would give PepsiCo a leadership position in a fast-growing market overnight, should the reports that the two might be close to a deal be accurate.
Vita Coco is the dominant player in coconut water globally and has a 45% share of the US market in a category that is still growing in the double digits and has relatively low household penetration, he points out, although coming in at this juncture means any acquirer will likely have to pay a sizable sum.
Where is the smart money going?
As for where the smart money is going more generally, while there is a bewildering number of new market entrants, with many players competing in the same space (functional beverages, protein snacks, plant-based products), “investors don’t feel like they need to pick the one that’s first to market, or even find someone that’s invented something completely new,” notes Wank.
“They just need to pick the best. There are a lot of examples of people that were in second or third to market, but ended up being the winners. There is a huge amount of opportunity in functional beverages, despite the distribution costs, because we know that every year people are drinking less and less soda and more and more of something else.”
**Talking Points June 2017. Cheaper food: A tale of commodities and competition, Nick Fereday, senior analyst Rabobank