Re-posted with permission from Supermarket News | By Jim Hertel
Slow growth usually results in cost-cutting measures to keep profits rising. But the latest trend in cost cutting seems deeper and more pervasive than at any time in decades, and it’s occurring during a nominal economic recovery. At the same time, trade industry headlines call out the acquisitions of natural and organic suppliers by traditional CPG companies (General Mills’ purchase of Annie’s and Campbell’s purchase of Bolthouse Farms) and the creation of venture capital funds by CPG to gain ground-floor access to promising start-up food producers.
Not too long ago, CPG manufacturers denied the product lifecycle, invested heavily in R&D, and believed that introducing meaningful innovation to their product set was one of their core functions — one that was an essential ingredient for growing their business.
But things have changed. R&D funding has lessened as more and more companies opt for line extensions versus developing truly innovative products. And now, with SKU proliferation at an all-time high, breaking into the crowded shelf requires even more disruptive innovation, which leads to more risk and is therefore more likely to be cut from the budget.
Additionally, there are other disruptive and disturbing trends that may indicate “Big Food” is throwing in the towel in terms of meeting the needs of today’s consumers. For example:
• Zero-based budgeting continues to gain acceptance as a viable means for driving EBITDA. While this may offer short-term financial gain, it may come at the expense of long-term growth.
• And while EBITDA may grow short-term, if the long-term consumer base is trending downward, can the mainstream food industry regain its ability to be relevant to emerging consumers?
• Perhaps the American public has become so distrusting of Big Food that they won’t even accept natural and organic products being owned by traditional food producers. Social media monitoring of recent acquisitions suggests that’s the case among at least a segment of the population.
Does Big Food believe it can cut its way to success? Can the growth of emerging brands and high returns gained from start-up investments deliver enough EBITDA growth to satisfy Wall Street?
If so, are we to believe that mergers like Kraft and Heinz are just the beginning? And will retailers follow suit? Or perhaps there’s a hybrid approach coming down the aisle in which a retailer acquires a natural and organic manufacturing company to manufacture its high-end private label.
Many Big Food companies have certainly become bloated. Recent volume trends suggest many of them have lost their consumer relevance if not consumers’ trust. Big Food can certainly benefit from the innovation and agility of start-up companies. But there are real questions to confront whether the current fascination with near-term EBITDA — growth driven by massive cost cutting — will look like a really bad idea in 3-4 years. Once the entire CPG industry has cut costs, what prevents individual companies from cutting prices when they want to gain share? If others follow suit — and they will have to — nothing will have changed except the transfer of wealth to retailers, consumers and more than a few food entrepreneurs. The CPG industry has succeeded by continually delivering significantly more value to consumers which has in turn created returns for them. Let’s not forget the need to satisfy shoppers before running with the bulls down Wall Street.