The State of the Food Industry: Five Questions Investors Are Asking

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This guest post comes to us from Nicholas Fereday. Nicholas covers Food and Consumer trends as Vice President, Global Senior Analyst at Rabobank International.

Rabobank recently attended the CAGNY (Consumer Analyst Group of New York) conference in Boca Raton, FL. This annual jamboree is where food and beverage companies line up under the palm trees to pitch to the so-called ‘buy-side’ analysts of institutional investors (such as pension, mutual and insurance funds). In these uncertain times, the predictable but rarely stellar returns of food companies are considered a relatively safe investment bet.

To some cynics, Boca is the perfect metaphor for the state of the food industry; a town full of retirees, passed their peak productivity, looking to enjoy their Golden Years in comfort and relaxation. But here at Rabobank we are dismissive of such negativity. When it comes to food trends, our Justin Bieber / James Bond inspired motto is, “Never Say Never”. It is never too late for a food product or category to reinvent itself. As our recent note, ‘The Popcorn Blockbuster: What the snack’s comeback means for the future of the food industry’ concluded:

“Tired brands and off-trend categories should take inspiration from the astonishing turnaround in the fortunes of popcorn. What was once considered unhealthy and junk has been transformed into a Millennial-friendly, cool and healthy snack.”

There are plenty of other examples showing that if you get it right, consumers are not averse to buying packaged foods. This growing list includes: snack bars, nuts, coffee pods (k-cups) as well as the more recent rediscovery of the frozen food aisle (frozen fruit makes great smoothies – and for the more adventurous, cocktails as well) all providing inspiring examples of category transformation. Pick it up guys, pick it up!

But as the earning reports this quarter highlight, many of these companies are not immune from criticism, far from it. Certainly, a little quizzing and prodding over their performance and direction is in order. Besides the generic Wall St. questions on future consolidation, impact of the rising dollar, lowering of commodity risk, etc., here are five questions we would love to know the answers to:

  1. Have the wheels fallen off your business model or do you just have a flat tire?
  2. How vulnerable are you to a ‘Snack Attack’?
  3. How do you attract and retain talent?
  4. The 3G Diet – How’s that working for you and your team?
  5. “Well, I didn’t see that coming!” – What events surprised you the most over the last twelve months?

1) Have the wheels fallen off your business model or do you just have a flat tire?

Spare a thought for the plight of Big Food and a business model designed to satisfy mass markets. In today’s multicultural, multimedia Millennial world it is a lot harder for big companies to react quickly to changing tastes and capitalize on emerging new markets. Like large shipping tankers, they are not built to make sharp turns, and take a while to change course and direction. What then to do? In our view, despite being structurally challenged, they can ultimately mobilize larger resources to play the longer game.

After all, they have the resources, capital, know-how and marketing muscle to actually create new trends, but seem to lack the willpower to continuously disrupt their own business with new innovation. (On this last point, Rabobank has a cunning plan to assist.)

2) How vulnerable are you to a Snack Attack?

Rule Number One for many of today’s trendsetters, dieticians and food gurus is “Don’t Drink Your Calories”. Repeating this mantra over time has had an impact – witness the precipitous drop in US soda consumption over the last decade, which has also spilled over into declining orange juice consumption over calorie concerns. The question we have is when will consumers begin to view other high calorie products such as many kinds of snacks in a similar disdainful light? Regardless of whether snacks are healthy or not, retails sales in the US $42bn snacking packaged food category are steadily increasing in value and equally importantly, volume.

According to Euromonitor, packaged snacks – which includes potato chips, pretzels, nuts, snack bars and popcorn – have grown in aggregate by 4% CAGR over the last five years with volumes up 2% per year. This is more than twice the overall growth rate of packaged foods.

As this market continues to grow and with obesity rates failing to head south, it is only a matter of time before the caloric impact of our snacking culture comes under greater scrutiny. How will companies respond? Have they for example learnt the lessons of the soda industry? Will it be enough for companies to tout a snack’s organic or natural credentials to deflect criticism (most consumers believe natural or organic products are by definition lower in calories than their conventional counterparts)?

3) How do you attract and retain talent?

Some food companies may have given up on marketing their products to Millennials (such as ConAgra’s Marie Callender brand for example) but unless they want an aging workforce they are still going to have to sell themselves to Millennials who represent an increasing share of the labor force. Back in the day, many of the larger food companies had a lot more kudos amongst the young. These were the days when winning a breakfast cereal account – well it just didn’t get any better than that for an advertising agency.

But in a world where Google, Apple or your latest start up are attracting the best and brightest kids often in the downtown neighborhoods of cities such as San Francisco or New York, what’s the lure in working in downtown Battle Creek or Pittsburgh or Camden? A venerable European company recently confided they are considering moving their marketing team to London in order attract talent;the current views of rolling hills and countryside just doesn’t cut it. Just as ADM and Tate & Lyle have largely abandoned Decatur for the bright lights of Chicago, should we expect similar relocations for other food companies?

4) The 3G Diet – How’s that working for you and your team?

In a similar vein, the 3G diet (the industry is still digesting the implications of 3G’s and Berkshire Hathaway’s Heinz takeover two years ago) may be working wonders slimming your cost curves but in an environment of repeated layoffs and where photocopying and business cards are rationed and flying at the back of the bus is the new normal, one has to ask about the fun and overall job satisfaction for white collar workers at companies on such fasting diets. Lesson for senior management – be careful how much fat you trim.

5) “Well, I didn’t see that coming!” – What events surprised you the most over the last twelve months?

Although most of the presentations at CAGNY will be forward looking, it is often worth recalling the events we did not see coming over the last twelve months – with a perspective towards learning lessons and being smarter for the future. In our view, the list would certainly include: GMO-free

Cheerios, the persistence of gluten-free, surprisingly strict calorie counts on chain restaurant menus and of course, the $820m purchase price for Annie’s by General Mills.

Join Rabobank at FoodBytes on February 25th in San Francisco! | http://www.foodbytessummit.com

According to the Food Institute, with over 500 deals, 2014 was a bumper year for M&A activity in the food industry; the highest in over ten years. Given all this activity and the rising cost of acquisitions, this begs the question, ‘Is it ever too early to start talking to potential acquisitions?’ Waiting too long for a company to prove itself in the market might just make it too expensive and food companies will increasingly have to explore the world of venture capital, incubators and start ups for their next big idea. To address this need, Rabobank is co-sponsoring a summit in San Francisco to match new or start-up companies in the food industry with investors – VC, PE funds or others – that are targeting opportunities in the food industry. FoodBytes! will bring together new ideas in food with new capital, in a half-day series of presentations, networking and dialogue between new companies which are innovating in food- related software and applications, distribution, manufacturing, production, and more, with food industry leaders and investors. For more information visit http://www.foodbytessummit.com.

ABOUT THE AUTHOR:

Specializing in consumer orientated aspects of the food marketing chain such as food manufacturing, food retail and food service, Nicholas covers Food and Consumer trends as Vice President, Global Senior Analyst at Rabobank International.