Consumer demand for fresh and less processed food has put enormous pressure on traditional consumer packaged goods giants, leading to a wave of high-profile changes in the sector, including cost-cutting, consolidation and acquisitions of hipper and smaller brands.
In the background, though, a different kind of change is taking place, as the embattled giants race to rejigger product ingredient mixes to meet new consumer tastes.
A study from The Consumer Goods Forum, a global industry network that counts among its members many of the biggest global CPG companies and retailers, found that about 180,000 products globally were redesigned—or, in its words, “reformulated”—in 2016 to meet consumer demands for healthier diets and lifestyles.
That’s more than double the 84,000 reformulations in 2015, and vastly more than the 22,500 in 2014, according to the study.
The 2016 study surveyed 102 companies, mostly retailers and manufacturers, from Walmart and Carrefour to P&G and Campbell Soup Co.
Cutting Out the Salt
What do these companies want to change? Among key target areas for “reformulation,” sodium, cited by 67% of respondents, ranked the highest on the list, followed by 61% who mentioned sugar and 50% who cited saturated fat. For personal care product companies, the removal of parabens, a commonly used preservative in beauty and other products, was their top issue.
While the growth is significant, that number still represents a small part of these companies’ portfolio, the study found. In fact, for 70% of the survey respondents, redesigned products represent 20% or less of their portfolios. Only 3% of respondents said reformulated products make up at least 61% of their relevant product portfolio.
“They are afraid to lose the current users they have,” said Michelle Greenwald, a marketing professor at Columbia Business School. It takes companies “a ridiculous amount of time to come up with new products. They can’t get rid of everything. The risk is if you lower the salt and fat, it’s not having as good of a taste. They don’t want to take a cost hit.”
However, the potential risk of alienating some existing consumers aside, CPG manufacturers and retailers, which are also becoming a bigger part of this redesign map because of their increased private label lineup, know they don’t have any other choice.
The Shift to Fresh
“Consumer preferences continue to shift towards fresher and healthier foods,” said Campbell Soup CEO Denise Morrison in a recent earnings call. “Nearly 80% of consumers, including younger ones, are trying to eat more fresh foods. These consumers not only believe that fresh foods are cleaner, healthier and less processed, but that they also taste better.”
A case in point is the company’s V8 V-Fusion and V8 Splash juices: Sales are declining partly because of consumer concerns about sugar, she said on the call.
The broad consumer trend has also resulted in the traditional grocery industry losing share to rivals like Trader Joe’s, which has a much smaller product assortment that’s easier to navigate and which touts a cheap selection of organic and fresh products, Columbia Business School’s Greenwald said. Other threats include Amazon and meal delivery kit companies, she said.Grocery stores and CPG companies are being killed.
“Grocery stores and CPG companies are being killed,” Greenwald said. “It’s just not a fun experience to go to grocery stores…. People want fresh. It’s not hard to cook fresh. It’s just as easy to make things from scratch yourself.”
In response, Campbell, for its part, has not only bought fresh-foods brands such as Bolthouse Farms and Garden Fresh, but also has launched new products, such as its Well Yes! ready-to-serve soup line that it said features “clean, simple” and real food ingredients, “without compromising on flavor.”
“You are going to see reformulations occur so (CPG companies) can stem the share loss,” said Randy Burt, a partner in the food and beverage practice at global strategy and management consulting firm A.T. Kearney. “You have to make sure the taste is going to be the same. Any time you change products, you change suppliers. There’s a lot of testing for these products you are reformulating. You may lose your existing customer base. There’s a lot of effort that goes to managing and addressing those risks.”
According to an A.T. Kearney study published in August 2016, the top 25 food manufacturers in the U.S. lost 3 percentage points in market share to small and medium-sized rivals from 2012 through 2015. Smaller companies tracked by A.T. Kearney experienced annual average sales growth of 11% to 15% over the same period, compared with 1.8% for the top 25 food & beverage companies.
The industry will likely continue the diversified strategy of merging with rivals to cut costs, revamping big legacy brands and buying smaller brands, which are then grown by extending them to other product categories and expanding their distribution network through the acquiring companies’ existing relationships with retailers.
Chocolate company Hershey, for instance, has bought Krave Jerky brand. Cheerios cereal maker General Mills has bought Annie’s organic and natural food brand and expanded it to new product lines. Companies including General Mills, Unilever and Coca-Cola also have started their own venture funds to build or buy emerging brands.
These smaller companies “have an authentic story,” said Burt. “They are able to move more quickly and are not encumbered by some of the issues that are faced by large companies that have a lot of processes and checkpoints. The question is how do you leverage these brands to extend them to different product lines and to learn from the startup mentality. The jury is still out.”
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