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6 Ways America’s Food Giants Can Survive Disruption

August 11, 2014

For companies operating in America’s $760bn food and $435bn restaurant business, it’s never been more interesting time, because of a combination of forces that are overturning some of the established traditions and thinking.

Many of our favorite food brands grew up in an age when Americans had different needs and they were much easier to reach. With fast changing attitudes and behaviors and the plethora of fragmenting channels, the work of the food marketer has never been more complex than it is in 2014.

Consumers are just smarter and more engaged in their food and their diet than they have ever been, the growth of food media and food as part of the cultural conversation has helped shaped that, as has the growth of food retailers and restaurant chains, like Whole Foods and Chipotle who’ve been pushing more natural and less processed alternatives.

In fact, the success of these early pioneers has already spawned a second generation of brands, like SweetGreen – a 27-unit chain East Coast chain focused on seasonal local salads.

Today, the market for organic food is now worth $32 billion and has been growing at an average annual rate of 10% since 2010.

The idea that the quest for quality and localness in food is merely a coastal urban phenomenon has been quashed by the ubiquity of farmer’s markets, the widespread growth of food halls and the demand for quality food experiences outside of the major metropolitan areas. Take for example the recent success of chef Hugh Acheson in the smaller southern cities of Athens and Savannah and the new opportunities for cutting-edge New York chefs to open their own restaurants in smaller markets like Minneapolis.

Quite simply, the norms established by the food industry over the past 50 years are being challenged and the traditional incumbents can no longer take their market positions for granted.

In addition, there’s also the reality of the economy that has forced many consumers to think much more about the idea of value and what they are willing to pay for. It might seem like these are contradictory forces, and in some ways they are because of the increasing bifurcation of society, but consumers aren’t binary; they are smarter and more aware in general and identifying the occasions when they are driven by value and those when they are prepared to pay for quality.  The clear implication is that food brands have to deliver value, or consumers will not pay their premium, a case in-point is Spain, where private label now commands an astonishing 51% of grocery sales.

To hammer this point home with relevance to the US market, in Deloitte’s 2014 American Pantry Study, 79% of respondents agreed with the statement “Going through these economic times has caused me to realize which brands I care about and which ones are less important to me.’

It’s never been more important for your brand to be differentiated and matter to consumers.

In the casual dining sector, it’s clear that many of the players are just simply no longer as relevant to consumers. They’ve compromised their differentiation, failed to respond to competitive challenges in the market and are suffering as a result. Earlier this year, Darden finally responded and earmarked $40m for a makeover of its Olive Garden brand, which includes a new logo, a new menu, and a brand positioning, which will all be fully rolled out across its stores by the end of August 2014. It remains to be seen if these efforts are enough to transform the ailing chain.

In QSR, McDonald’s seems also to have its own challenges, having just experienced its worst run of monthly sales declines for 13 years. 

The problem is that the brand is finding it tough going to grow in a bifurcated market. The lower income consumers aren’t spending enough to drive the growth and the higher income consumers are looking for higher quality.

The company is currently in the middle of a wide-ranging turnaround plan “Plan to Win” to improve its position. These initiatives are focused around improving service, the value perception of the food, establishing a stronger emotional connection through marketing and menu simplification.  The company also wants to improve its digital capabilities, which are currently somewhat lackluster, when compared to a digital leader like Starbucks, to do this it recently established a West-Coast “learning lab” to better understand consumer needs. This plan isn’t simply cosmetic BS, it’s designed to allow the brand to be competitive against the likes of Chipotle and even includes the desire to serve sustainable beef by 2016.

In the broader world of food, one only has to look at the transformation of the breakfast occasion for a reflection of the changing dynamic, as we’ve seen many traditional players caught off guard by changes in the category including the unexpected rise of both Greek yogurt (Chobani’s sales are expected to reach $1.5bn this year) and natural bars (now worth close to $2bn and growing 10% per annum). One of the stars in the bar space is Kind, who, with a smart distribution strategy, the right product and revolutionary transparent packaging, grew sales from $10m to an incredible  $120 in just 2 years from 2010 to 2012.

It’s been estimated that the major cereal companies have lost between $300-$400 million in wholesale profit in the past three years as a result of transformative changes in the category.

While the important Baby Boomer and Senior audiences (responsible for $200bn or 50% of total CPG spending), on the surface look like a very attractive opportunity for the cereal players, because they’re an population and have nostalgic feelings for the brands of their childhood. However, it’s likely that their specific health needs will drive a different set of choices for their breakfast needs.

Then there’s an expanding Millennial population, who have an entirely different set of needs, partly because their taste requirements are much more complex and sophisticated than older generations. This is also a group looking for fresher and better foods; they’re anti-nostalgia and more attracted to newer “clean slate” brands and offerings.

One big challenge for the cereal players is the change in the way consumers considers their diet and health. Today, they’re less obsessed with counting calories and thinking more about overall nutrition. A quick look at Google Trends shows that searches for “Counting Calories” has declined 75%, from its peak in 2005.

The other very important consideration is the role of breakfast and how it fits into a consumer’s complex daily needs. Certainly convenience matters, it has for decades, but with increasingly hectic lives and potentially unforeseen demands for their time, consumers are using breakfast as a way of stocking up on their energy needs for the day ahead. While the working day might be unpredictable, as meal plans get pushed off, at least breakfast, while time constrained, is something they can control and use to get ahead.

Just consider the reality of the working household- today close to 60% of mothers with a child under the age of 1, are in the workforce. Time is so crunched that according to NPD, the average household spends an average of just 12 minutes on breakfast, which is likely probably a result of commute times increasing 20% from 1990-2010.

In home, responsible for 80% of breakfasts, we’ve seen significant double-digit growth in frozen handheld breakfasts, just when experts were writing off the frozen good category. In restaurant, we’ve seen competitors line up to take on the category leader McDonald’s with new sandwiches. Chains like Dunkin Donuts (80% of its sales come from the breakfast day day-part, launched Eggs Benedict and Turkey Breakfast sandwiches), Starbucks (experiencing 40% year-over-year growth in breakfast sandwich sales), Taco Bell (following the launch that included the Warm Waffle Taco-with bacon, cheese and egg, breakfast now accounts for 7% of the company’s total revenue and Panera (launched an Egg White, Avocado, Spinach Power Breakfast Sandwich), the commonality between all of these initiatives is protein.

Protein has been riding a wave of popularity for a while and has been kept in the spotlight by various diet crazes including the most recent, Paleo Diet. Protein works because it’s easy for consumers to understand and in their minds it translates to healthy and provides one very clear benefit everyone wants, more energy. Energy matters because many Americans feel they are under increasing pressure to perform. Given the choice between more time, or more energy, most would choose energy.

For many of the traditional breakfast players, increased competition couldn’t have come at a worse time, just when the innovation pipeline was drying up and advertising support was cut to fund retailer merchandising programs, that were often less than effective.

Food marketers can’t simply blindly follow the old rules and expect to succeed. The new consumer dynamic requires a very different approach that is much more adaptive and flexible, so that it’s possible to respond to changing needs and demands.

As UBS analysts recently wrote this about a major US food manufacturer.

“At times, management has appeared overly complacent about its competitive advantages and overly confident that consumer spending and preferences would return to historical patterns”

Food marketers could learn something from the fashion business; an industry that’s obsessed with keeping up with and responding to changing consumer needs.

This approach demands different organizational structures, ones that aren’t’ bogged down by bureaucracy and are staffed by teams with enough power and autonomy to drive change.

We recently noted that Kellogg acknowledged this as a factor when it re-located Kashi back to its original home in La Jolla, California from Battle Creek, Michigan.

The whole purpose of moving the business back to La Jolla is to increase the rate of speed, the agility, the ability to get on-trend much faster, and be more in-line with that community”

John Bryant- CEO- Kellogg

Charles Darwin’s insight that it’s not the strongest that survive, but those most capable of adapting to change, seems appropriate in the context of the food business these days. The old school thinking was about dominance of shelf space and of brand mind share, but this has created a culture of arrogance inside organizations and subsequent vulnerability. This has been exploited by young, nimble start-ups who’ve emerged in the food business, like they have in other industries, with products highly attended to consumer needs and achieved success as a result.

So, what do incumbents need to do in order to thrive in this new environment?

1.    Put the Consumer at the Center

Too much of food marketing has been driven by the needs of people who are ancillary to the consumer; like store buyers and franchisees. To succeed, companies need to pay more than lip service to consumer needs; they need to put them at the very heart of what they do. This means establishing new ways of understanding beyond traditional qualitative and quantitative methodologies. Instead companies need to be tapping into new rich steams of data from social channels, creating their own panels and communities of users, but also spending time in-situ with people to really understand needs and behavior in context. All this has to be done in an “agile” manner, so it’s not a process, or a “one off”, but instead a system that’s designed to constantly uncover relevant insight.

2.    Create a Responsive Organization

It’s tough to generate meaningful innovation from committees, in order to create successful products; the organization needs to change the way it works. Teams need to be smaller, given more autonomy and allowed to break from established protocols in order to achieve success.

3.    Think Big Picture

Many of America’s largest food companies were established with a desire to positively impact society. As time has passed, some of these values have been forgotten and need to be re-ignited. Brands play a role in the world beyond the product and as issues around climate change and sustainability become important, brands need to step up. Unilever’s CMO, Keith Weed puts the issue into sharp focus “People are always asking me for “what’s the business case for sustainability? And I always answer “I would love to see the business case for the alternative.”

4.    Niches Can Be Good

The food industry’s obsession with mass is no longer ideal. The country is fragmenting and bifurcating into small entities with unique needs and desires. The idea that one-size can fit all is outmoded and outdated. Food brands need to uncover and understand segments and niches that exist. Some of these might be driven by new occasions that are emerging with the breakdown of traditional meal structures (NPD data shows that 53% of Americans now snack 2-3 times/day), some could come from serving new consumer segments (like the needs of “singles” who now constitute 57% of American households) and others from the transformation and evolution of taste.

5.    Brands Need Substance

In a marketplace where consumer is smarter, they are demanding that brands stand up and be counted. It’s no longer sufficient for a brand to have a long history and an established equity. It’s all about what you can do for consumers today, how you can satisfy their desires and needs. This demands brands have substance, which means not only does the product meet and exceed needs, but also it’s connected to a powerful consumer desire. Without both these elements, brands cannot expect to make it into the shopper’s grocery basket.

6.    Be Prepared to Change the Game

When you look at the strategy behind the success of Chobani, it’s clear the brand couldn’t afford to and didn’t want to play by the rules of the category. During the brand’s launch phase, Chobani wasn’t concerned about having Costco and ShopRite as its primary distribution partners, or stifled by the lack of funds available for advertising support, instead hey used social to grow their brand. When they could finally afford advertising, they used the fan base to talk about taste, a territory that had been ignored by other brands, as they obsessed over the health benefits.

Back in 2013, Mondelez’s operation in Latin America realized there was a huge opportunity to get more out of the marketing minds working on its business inside and outside of the organization, so it created “Fly Garage”; a collaborative workspace where cross-functional teams can truly work together to come up with an action fresh thinking for the company’s brands. This initiative unleashed a torrent of new ideas, which lead to increased success for brands in the marketplace.

In the US, a couple of the hottest emerging restaurant brands appear counter-intuitive in the way they push taste boundaries; Umami Burger (a fusion of a classic American burger and Japanese flavors) and ChocoChicken (specialty dish-fried chicken covered in chocolate), both inventions of Adam Fleishmann, show just how far the market has come and could be prepared to go.

To conclude, it’s never been a tougher time to  market food, but it’s still about relevance, as it always has been. The challenge is to understand what it takes to relevant to your specific target and to focus your efforts on that.

With new streams of data and new ways of uncovering insight, in some ways, it’s never been easier. What it takes to make this work is a willingness to buck the system, break conventions, experiment and find new ways to get to the market faster.


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