A Recipe for Growth in Packaged Foods - Breaking away from legacy behaviors
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A Recipe for Growth
in Packaged Foods
Breaking away from legacy behaviors
THE HARTMAN GROUP’S THOUGHTS ON THE EVOLUTION IN FOOD & BEVERAGE CULTURE
A Recipe for Growth in Packaged Foods
Breaking away from legacy behaviors
Harvey Hartman, Founder & Chairman, and James Richardson, Ph.D., Senior Vice President
M
ajor U.S. food and beverage companies are experiencing anemic
volumetric growth, according to The Hartman Group’s analysis of
Euromonitor data. It revealed that from 2012 to 2013, more than
half of the top 14 branded food and beverage companies grew their U.S.
retail revenue slower than 1 percent inflation.
The implications are troubling for those at the helm of food and beverage
companies with large exposure to the U.S. retail food market:
demand is tapping out for many legacy branded food products, as these
businesses can no longer count on population growth as a basic
...demand is guarantor of top-line growth
tapping out for innovation from many legacy brands continues to produce short-lived
top-line hits, not sustained and/or large accretions
many legacy
innovation successes (i.e., large first-year hits) are not necessarily
branded food making up for volume losses elsewhere
products, as these brand portfolios are becoming segregated into decliners, flatliners and a
small group of power brands, creating turf struggles over marketing/
businesses can no innovation investments
longer count on During three days of sessions at IRI’s recent “Winning the Race to Growth”
summit in Orlando, ironically, the mood seemed fairly upbeat, despite the
population growth unimpressive performance of the industry. The default assumption at the
as a basic summit was that the industry’s problems are related to:
guarantor of top- a) macroeconomics
line growth b) stale go-to-market strategies and/or
c) inefficient marketing/promotions
In other words, the reasoning is that everything will be solved when GDP
picks up and when companies use better data to plug distribution holes and
reach consumers with better targeted digital promotions.
THE HARTMAN GROUP 1
A RECIPE FOR GROWTH IN PACKAGED FOODS
The Hartman Group has a different theory: It’s about the food.
In three days of conferencing, rarely did the subject of product or product
design come up as part of the recipe for growth. That’s mystifying, given the
relentless double-digit growth of disruptive upmarket food retailers that sell
highly differentiated foods curated to a contemporary set of quality criteria.
Even the management consultants on hand commented on the market-
share growth of small brands.
The biggest long-term challenge facing the U.S. food industry is that taste
preferences are changing. This is most apparent among highly urbane and
educated consumers, where the arbitrary boundaries of “too sweet” and “too
fatty” are altering in ways inimical to the core food science paradigm of the
U.S. food and beverage industry.
The U.S. food industry routinely serves crude flavor profiles associated with
the unsophisticated farm cuisine of Middle America: heavy on salt, dairy
and animal fat and, in the past half century, sugar. Fattiness. Sweetness.
Saltiness. These are the primary flavor triggers the American food industry
knows how to engineer and incorporate into branded processed foods. And
it is very, very good at it. For years, there was growing demand for these
flavors in all sorts of foods, primarily because U.S. preferences were not
The Hartman changing.
Group has a
Now they are. The increasing multiculturalism of the U.S. population plus
different theory: the globally well-traveled, savvy upper-middle class have created a large
population of consumers intentionally seeking complex flavor profiles
It’s about the food. imported from much more sophisticated food cultures.
In addition, overconsumption of traditional fatty and sweet foods became
associated with rapidly rising rates of obesity, heart disease and diabetes.
More educated or health-conscious consumers are readjusting their
boundaries around fattiness, saltiness and sweetness, especially the latter.
Subtle sweetness, targeted saltiness and moderate fattiness are now
spreading as the new norm for modern U.S. consumers. While new
preferences will not eliminate our desire for the ‘old stuff,’ these
recalibrations are capping growth in many legacy brands that cannot simply
reformulate to the new taste profiles without losing their brand identity
(e.g., low-fat, low-sodium Cheetos?).
A perplexing twist is that upmarket consumers are simultaneously driving
growth in high-fat-content categories such as olive oil and high-sweetness
categories such as honey. The apparent contradiction is part of the
complexity of upmarket shifts in food culture. Unprocessed sources of
fattiness and sweetness are allowed a backdoor pass. It’s a cultural truth
that’s hard for mainstream brands to act on, because these kinds of natural,
pure sources of fat and sugar lose their acceptability halo once transformed
into heavily processed foods.
The shift from a traditional, all-American diet based on crude flavor profiles
to a multicultural one that includes subtle, global flavor profiles is naturally
leading consumers to new foods (e.g., Greek yogurt, hummus) and to the
emerging brands that herald their arrival.
THE HARTMAN GROUP 2A RECIPE FOR GROWTH IN PACKAGED FOODS
As U.S. food preferences have changed, large industry players have been
slow to react. The tendency is to use marketing, trade promotions, big data
and digital media to plug the leaky bucket. But we are confident the industry
can catch up with consumers.
Here’s our take on how senior executives should respond:
Battle Big for Growth Categories, Not Just for Existing Category Share
Many legacy brands face a much bigger problem than the age of their brand
or its “relevancy.” They are competing for share of declining categories in
food culture (Hint: don’t invest in Worcestershire sauce).
Yet, out of a sample of nearly 300 product launches from top food
companies followed by The Hartman Group since 2012, less than 1 percent
involved food categories introduced recently (i.e., in the past 20 years) to
Americans. The inability of major packaged food companies to broaden
The future is about their view of where to grow in the store continues to benefit their retail
partners, innovative supply-chain companies and entrepreneurs.
making trends in
The situation is even more perplexing when large companies buy emerging
food based on brands in these growth categories but fail to develop them.
desire, play and
Follow the Lead of Upmarket Entrepreneurs
possibility made Entrepreneurs have created fast-growing premium segments across the
possible by grocery store, because they have higher risk tolerance, are closer to unmet
consumer desires at the edges of the market and display far more nimble,
unprecedented scrappy go-to-market strategies to steal share. Expo West 2014 broke all
records in terms of scale; everyone wants in on the premium food and
affluence at the beverage market. Midmarket grocery chains have staff scouring the country
for cool new brands to bring into their stores.
upper end of the
market. What these small players intuitively understand is that we no longer need to
worry about economical calorie supply. The future is about making trends
in food based on desire, play and possibility made possible by
unprecedented affluence at the upper end of the market.
After five years of focusing almost exclusively on pricing down to boost
value perceptions among the disadvantaged end of the market, food
executives are just beginning to sense that the upmarket entrepreneurs may
have a point: Why not upsell consumers who want to be upsold?
Restructure to Allow for Upmarket Innovation and Investments
The majority of packaged food and beverage product launches are low-risk,
mainstream extensions not generating more than temporary share grabs.
They do not succeed, because they offer little of interest, even to a brand’s
heavy buyers. The last decade of top first-year launches in food produced
few sustainable businesses, despite their eight-figure runs out of the gate.
This is because, to obtain large first-year success, you must pander to
THE HARTMAN GROUP 3A RECIPE FOR GROWTH IN PACKAGED FOODS
established mass-market preferences with distribution and brand as your
primary weapons. The problem is that these mass-market preferences are
the same ones your competitor targets, and the demand curve behind them
has flattened in food culture (i.e., too many products chasing the same
traditional flavors/textures/benefits).
The most successful long-term lines of new business in food in the past 20
years have come from early-stage companies birthed upmarket. However,
unless you have a track record of investing in upmarket brands or own
legacy brands (e.g., Cheerios) with substantial upmarket consumer
purchasing, it can be difficult to tap into this lucrative area.
Investing in upmarket acquisitions and innovations generally requires a
separate entity to incent the pursuit of multiple small bets, long-term wins
and a different set of consumer demand assumptions than the base.
Let Go of Legacy Brand Bias
Few companies are becoming brand agnostic enough to “let go” of
The most yesterday’s cash cows and focus a portion of their base profit dollars on
successful long- investing in huge upside opportunities. The dispassionate gaze of the
blended fund manager is one that senior management should adopt rather
term lines of new than the overenthusiasm of today’s brand evangelists. If a brand won’t
respond to sensible investments but is otherwise stable, stop overinvesting
business in food in in it.
the past 20 years
have come from Permit New Revenue and Margin Models for Upmarket Launches
The dominant revenue models of today’s packaged food companies are not
early-stage suited to launching, or investing in, the new growth engines (e.g., fast
growth, lower initial gross margins). Why? Upmarket product design often
companies birthed involves lower initial gross margins, with profit scaling as the business
grows and costs come down on non-traditional ingredients that are
upmarket. essential to differentiation.
The value in upmarket growth engines like these is that, if done well, the
profit stream is continuously growing along an S curve of 10 to 15 years
(before flattening out) with less marketing investment than required to
generate low-single-digit growth in larger cash cow brands.
Build New Supply Chains
Tapping into evolving food preferences upmarket cannot avoid radical
supply chain issues. Some of the biggest hurdles are getting organizations to
aggressively pursue economical sources of super-premium ingredients that
often drive the growth of new categories (e.g., hummus, non-GMO).
Invest in Separate Consumer Demand Analytics from Base Consumer Insights
Traditional consumer insights organizations are oriented to defense, not
offense: studying core users and brand-switching behavior or identifying
slivers of market share to grab for small, often unsuccessful, line extensions.
THE HARTMAN GROUP 4A RECIPE FOR GROWTH IN PACKAGED FOODS
Years of training reinforce assumptions and habits that will not help drive
strategic upmarket investments, a process where default, mass-market
assumptions about consumer behavior are unhelpful and misleading.
The key is to develop a talent for studying the edges of the consumer base,
the consumers who are most dissatisfied with your current products. These
non-customers have underserved needs your organization will not see by
studying legacy brand heavy users. Deep, niche ethnography and nuanced
analysis of the less measured channels are key components that are
systematically underutilized.
Not all of this advice is easy to implement without a strong CEO insisting
that the upmarket opportunity be prioritized along with stabilizing the base.
Leadership at the top is the most critical tool for catching up with rapid
shifts in American food culture.
ABOUT THE AUTHORS
Harvey Hartman, Founder & Chairman
Harvey has earned a reputation among his many Fortune 500 clients for accurately
translating how shifts in consumer behavior can be converted into solutions for
overcoming growth and innovation challenges. Since founding the company in 1989,
Harvey's been the soul, inspiration and charismatic force guiding The Hartman Group's
success. Under his leadership, The Hartman Group has become recognized as the
leading authority on consumer culture in America.
James F. Richardson, Ph.D., Senior Vice President, Hartman Strategy
James heads up The Hartman Group’s strategy division that now stands as the only
innovation strategy consultancy focused entirely on the U.S. food and beverage sector.
Hartman Strategy works with domestic and global food and beverage companies to
identify, create and seize white space opportunities that align with constantly evolving
food culture. James’ unique perspective on food innovation draws on his doctoral
training as a cultural anthropologist and ten years of market research and innovation
consulting experience for leading food companies.
The Hartman Group
The Hartman Group is the principal provider of global research on consumer culture,
behaviors and demand, and a leading advisor to the world’s best-known brands on
market strategy. Through a unique suite of integrated custom, primary research
capabilities, market analytics and business strategy services, The Hartman Group
uncovers opportunity spaces and avenues for growth for clients across the consumer-
driven marketplace. The Hartman Group is internationally recognized for breakthrough
perspectives on emerging trends and evolving consumer behaviors in health and
wellness, sustainability and food culture.
www.hartman-group.com
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