GUEST ARTICLE: What has the pandemic revealed about the future of premium food?
Many tended to reduce the rapidly scaling premium CPG sector to its most famous symbol – the USDA organic seal. But something much more significant was afoot. At that time, the double-digit annual growth in the premium food sector was driven by hundreds of separate attributes, some incubating future categories like Greek yogurt, hummus, and kombucha.
Premium food is almost a century old in the United States. It’s just that it took decades for it to get cultural hooks into our daily foodways.
In 2000, the premium food space was a mere $12bn, or a 3% share of TTL food (defined by Nutrition Business Journal as all retail channels: natural and specialty retail, mass market retail, e-commerce, MLM/network marketing, DRTV/mail order/radio and healthcare practitioners).*
By the end of 2020, the premium food sector had reached $93bn in annual sales or a much more significant 14% share of TTL food.
The annual growth rate for premium food peaked in 2006/7… and ever since, it has quietly decelerated
What began decades ago as an imported European specialty food space tied to specific holiday occasions has unlocked new consumption opportunities at the daily level, starting with ice cream and cheese in the early 1990s. Many misread the 1980s spread of artisan cheese and fancy ice cream as a more seasonal/holiday trade-up behavior that would never really scale.
Here’s the thing. The annual growth rate for premium food peaked in 2006/7 (at 16%), not long after I began working in the industry. And ever since, it has quietly decelerated, until 2020 and the worst pandemic in a century hit the markets.
In 2020, the annual growth rate spiked to 12% vs only 6% the year before. The transfer of restaurant meal consumption back into the home is the reason this happened. And some of that transfer of meal-related $ is going to be permanent in specific occupation groups.
It’s not clear if premium food will ever accelerate long-term again. It’s likely close to its baseline growth rate for this decade, driven in part by inflation.
Pandemic winners and losers in premium food categories
Now that the sector growth has cooled, operators and investors must optimize growth for brands operating in a more competitive, over-supplied premium food space. The first step is to understand where your category fits into the context of the continued premiumization trend in food in the US.
The pandemic has provided you a rare behavioral laboratory to understand critical long-term issues in your category. The answers in the pandemic data affect how aggressively you need to compete in what is no longer a high-growth sector (comparing 6-7% YoY to 1% in TTL food is a tempting form of optimism, but it buries significant category variation in the premium food sector).
The food categories that grew premium share the most were mostly oriented to quick home meal prep
The critical variable to help us here is premium market share. The market share growth of premium food may seem academic to some. Still, it ties loosely to how much linear shelf space chain retailers assign to premium brands vs. what they assign to premium brands in an adjacent category.
Look at premium yogurt for an extreme case (pun intended). Then, walk over to premium soda for an opposing case. Gulp. The smaller the market share, the quicker the shelf becomes oversupplied with new entrants and the harder it is to add chains to grow (because the next buyer isn’t going to be very concerned financially about her premium $ upside).
Premium market share increased in most food categories in 2020, but the variation was enormous (from 0-9.5%). Remember, this is all in just one year.
The food categories that grew premium share the most were mostly oriented to quick home meal prep. This ties directly to lost sit-down restaurant sales and grab-n-go lunch sales in urban downtown cores (which are still down).
Many consumers may have permanently traded up to premium offerings in packaged meals, meal solutions
The long-term market share growth pace of premium food was relatively stable and geometric up until 2020. But, what’s even more interesting is that there is a tight, 80% correlation between the categories that gained the most premium market share in 2020 and the categories that have been growing premium share the most in the last ten years.
These are food categories oriented to quick meal preparation, such as canned soup, frozen meals/entrees, pasta, and fats/shortenings (among a few others). The reality is something I’ve suspected quietly for a long, long time.
Packaged meals, meal solutions, etc., have been way too processed and harmful tasting for way too long. This is despite the technology to preserve them well for 90-120 days. The pandemic’s disruption to restaurants forced millions to confront this fact, and many may have permanently traded up to premium offerings.
Before the pandemic, packaged convenience meals were among the final frontiers of premium grocery trade-up among those who study adoption in the premium food sector.
2/3 of food categories did not gain much premium market share
Although I’ve pointed to the straightforward, long-term winners from the pandemic disruption, 2/3 of food categories did not gain much premium market share, nor did premium $ sales in these categories get much of a boost (this applies to more than half of premium food $).
For premium brands growing in these categories, competition remains as tight as it was before the pandemic. And shelf space for premium may have shrunk in some chains.
The poor response to the pandemic jolt among snack food categories should concern investors
The poor response to the pandemic jolt among snack food categories should concern investors. There is no behavioral reason that consumers shouldn’t have traded up or consumed even more premium snack food units in 2020 when they were stuck at home. It appears they didn’t.
The iconic Frito-Lay brands did exceptionally well as their comfort food cultural equity comforted our stressed-out minds during lock-downs.
Conversely, while investors have traditionally been reticent to invest in frozen and refrigerated snack/meal brands due to the lower operating margins of these categories, they should reassess this position in a world where the most profitable adult premium food consumers are not returning full-time to the office for breakfast and lunch.
*Source: data from Nutritional Business Journal Chart 82, PGS analysis; fluid milk and dairy milk alternatives counted as food in this analysis
James F. Richardson, Ph.D. – a cultural anthropologist turned business strategist for emerging food and beverage brands - is the founder of Premium Growth Solutions, a consultancy for entrepreneurs and investment firms focused on the premium end of retail food and beverage, the host of the Startup Confidential podcast, and the author of Ramping Your Brand: How to Ride the Killer CPG Growth Curve