The Supply Side: CPGs move to protect market share, change image and grow sales

Consumer packaged goods (CPG) manufacturers continue to tweak their portfolio of brands like poker players who let go of a few cards hoping to draw a better hand and stay in the game.

With cheap money, lower taxes and a plethora of competition from private label brands and direct-to-consumer sales, industry experts expect acquisitions and divestitures among CPGs to continue this year at record proportions.

Brita Rosenheim, a partner with Better Food Venture, said CPG manufacturers are wrestling with how to compete with a growing cast of private-label grocery brands picking up more market share.

U.S. consumers spend about $725 billion on packaged foods annually, of which private label is roughly $120 billion, according to McGuireWoods. The CPG industry has seen private label take a larger chunk of the market over the past several years. Last year private label had an 18% market share of the CPG sales. It’s poised to grow with Amazon’s entrance into private label perishables, from household items to baby food to vitamins, which are delivered straight to the customer, according to Robert Crawford, a food analyst for McGuireWoods.

Crawford said retailers from Amazon to Wal-Mart Stores are expanding private brand offerings to enhance margins and drive top-line profits. At the same time, consumers want CPG suppliers to innovate and deliver new products. Rather than start from scratch, many CPG companies acquire that innovation via startup or niche food ventures that can benefit from wide distribution and plenty of capital.

BUYING NEW BRANDS
CPGs also are looking to make acquisitions or divestitures to change an image or consumer perception. Michael Milken, founder of the Milken Institute, said companies like Nestlé and Kellogg are trying to change their image to appeal to a more health-conscious consumer. Nestlé’s new CEO is a former health care professional, and when he proclaimed to the public Nestlé was a health-conscious company, consumers were skeptical given in the U.S. some of the top candy brands include Baby Ruth and Butterfinger. It wasn’t long until Nestlé put its U.S. candy business up for sale. Italian candymaker Ferrero, seeking to grow its U.S. share, recently acquired 20 Nestlé candy brands for $2.8 billion.

Kellogg Co., maker of Frosted Flakes, is seeking to remake its image with consumers who began choosing protein bars over sugary cereals by acquiring the RXBAR brand from Peter Rahal. In October, Kellogg paid $600 million for the Chicago Bar Co., owner of the RXBAR. The bars are made from eggs, dates and nuts, and in just four years Rahal took the product from his parents’ kitchen into national distribution with Whole Foods, Target and Wal-Mart. Last year the company had roughly $100 million in revenue with sales of 120 million bars. Rahal will remain CEO of RXBAR and report to Deanie Elsner, who leads the food giant’s U.S. snacks business. The company has 75 employees who remain based in Chicago. Rahal said he plans to add 40 new employees in the first half of this year.

Kellogg bought a trendy brand that appeals to younger customers and has a strong presence online.

“RXBAR is perfectly positioned to perform well against future food trends. RXBAR has built an incredible business as a clean-label, high-protein food and is an excellent strategic fit for Kellogg and helps advance one of (our) goals to become a global snacking powerhouse,” said Kellogg CEO Steve Cahillane.

Rosenheim said CPGs need to be more nimble in how to continuously reinvent product offerings and distribution strategies to keep up with the new retail world order led by Amazon/Whole Foods. She said other challenges for CPGs stem from fragmentation of consumer tastes, proliferation of alternative shopping options like Trader Joe’s and Whole Foods, and rise of digital as a way to reach consumers outside traditional mass media.

REMAINING RELEVANT
Food giant Conagra Brands, in a quest to modernize its product portfolio, acquired the trendy popcorn brand Boomchickapop for $280 million in September. It joins a product portfolio which includes Reddi-wip, Slim Jim and Banquet frozen dinners and is part of a category the company revamped in 2016 with Healthy Choice power bowls and Wicked Kitchen meals featuring quinoa and kale.

CEO Sean Connolly said the company hopes to achieve similar success with its grocery and snack business. This year ConAgra expects Boomchickapop to bring in $100 million in sales. The company also owns Orville Redenbacher’s popcorn brand.

“This is not a new phenomenon,” Connolly said. “But it’s a good reminder that brands are resilient and you just have to put in the hard work to make sure they’re relevant for the next generation.”

Keurig Green Mountain recently inked a deal to acquire Dr Pepper Snapple Group for roughly $21 billion. The deal announced Jan. 30 will create a North American beverage company with brands including Green Mountain Coffee, Dr Pepper, 7UP and Snapple. Analysts said the deal makes sense for both companies given Keurig wants to diversify its U.S. coffee business and Dr Pepper needed a revenue boost, given soda consumption is falling.

“If your truck is becoming less full because volumes are declining, you should have other beverages to fill that spot,” said Ali Dibadj, analyst at Bernstein.

The companies expect $600 million in cost-savings, and see opportunities to expand the business such as by selling coffee in bottles and in vending machines. Dr Pepper’s direct-to-store delivery model will be complemented by Keurig’s online presence and relationships with major supermarket chains, according to Dibadj.

On Dec. 18, Campbell Soup Co. made its largest acquisition to date with the $4.87 billion deal to buy Snyder’s-Lance Inc., which includes brands like Kettle, Pop Secret and other snack items.
“This acquisition will dramatically transform Campbell, shifting our center of gravity and further diversifying our portfolio into the faster-growing snacking category,” Campbell Soup CEO Denise Morrison said in a statement.

Campbell Soup sales have been under pressure for several years but the company has pushed to change that destiny though acquisition since its 2012 purchase of Bolthouse Farms and the 2015 acquisition of Garden Fresh Gourmet. Ken Goldman, a food analyst with JP Morgan, said the company has learned the hard way it’s not easy to assimilate artisan companies into the one-size-fits-all model used by most CPGs.

This led Campbell Soup to set up its own venture fund to allow for investing in food startups. Other CPG and food companies setting up their own venture capital funds include Coca-Cola, General Mills, Mondelez, Unilever, Procter & Gamble, Tyson Foods and Nestlé.

Diana Sheehan, director of retail insights at Kantar Consulting, said more food companies are choosing to form venture capital funds or incubators that can be used to nurture startup acquisitions and she expects this trend to continue.

“It’s a safe and smart way to invest, without going all in,” Sheehan said. “This allows them to follow the firm, then decide how much they want to spend over time.”
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Editor’s note: The Supply Side section of Talk Business & Politics focuses on the companies, organizations, issues and individuals engaged in providing products and services to retailers. The Supply Side is managed by Talk Business & Politics and sponsored by Propak Logistics.