Big Food is in big trouble.
For over a century, brands such as Kellogg’s cereal, Campbell ’s soup and Aunt Jemima pancake mix filled pantries of American households that wanted safe, affordable and convenient food. They provided companies with reliable revenue growth from grocery shelves, and there was little reason to mess with that formula.
Today, these giants are struggling with competition that is corroding business from both ends. High-end consumers are shifting toward fresher items with fewer processed ingredients while cost-conscious shoppers are buying inexpensive store brands. The makers of staples including Chef Boyardee canned pasta and Hamburger Helper meal kits failed to spot the threat and didn’t innovate in time.
Anyone searching for macaroni and cheese, a childhood staple, can opt for fancy pasta with organic ingredients or inexpensive store brands such as Kroger Co.’s . Squeezed in the middle are Kraft Heinz Co.’s venerable blue-and-yellow boxes.
The pressure has set off a bout of soul searching in the industry as well as some dramatic restructuring. Some companies are shedding underperforming brands, others have contemplated mergers. Nestlé SA, which said in June it was looking to sell its U.S. confectionery business, is now the target of an activist investor.
Younger companies such as Chobani, the Greek-yogurt maker, have taken market share from giants such as General Mills Inc., GIS -0.94% which came out with Greek-style Yoplait yogurt, but too late to catch up. “We were late to respond as Greek yogurt developed early in this decade,” said General Mills Chief Executive Jeff Harmening, noting double-digit declines in Yoplait sales lately. “Our sales have suffered as a result.”
The plight of the packaged-goods companies is a classic business tale. An industry creates winning products, carves out strong market positions and enjoys reliable, sustained revenue—only to be too slow to adapt to changes that threaten those cash cows.
“A lot of what’s crept into big companies is internal focus, bureaucracy, PowerPoint presentations—the antithesis of agility,” said Sean Connolly, chief executive of Conagra Brands Inc., maker of Hunt’s ketchup, Peter Pan peanut butter and Chef Boyardee. Mr. Connolly joined Conagra in 2015 and said he is trying to shake this mentality and move faster at coming out with new products.
Many big brands didn’t move fast enough to remove artificial ingredients and haven’t been able to shed the negative perception of processed food, said several food executives and others close to the industry.
At the same time, they faced low-cost store brands—or “private label” products—from retailers such as Costco Wholesale Corp. , Wal-Mart Stores Inc. and regional grocers that sell copycat products. National brands, which have huge marketing costs, generally can’t afford to compete on price with the in-house brands of stores, which need little marketing beyond displaying products prominently on their own shelves.
Store brands gained popularity around the financial crisis, and analysts expect their market share to rise as they add natural brands of their own and as discount chains, which mostly sell store brands, expand.
Private-label-product shelf space has expanded 3.5% a year since 2012, estimated Credit Suisse analyst Robert Moskow in a recent report. Big brands face escalating price pressure from the incursion of store brands and from retailers demanding lower prices, he wrote. “Up to now, the Big Food companies had sufficient pricing power to drive earnings higher even though they had been losing market share to smaller entrepreneurial organic and natural brands.”
Big food sellers still dominate in America. The 25 largest food and beverage companies commanded a 63% share of $495 billion in U.S. food and beverage sales in 2016, according to consultancy A.T. Kearney.
That is down from 66% in 2012, and even seemingly small market-share losses hurt sales and profits. The top 25 companies averaged 2% annual sales growth from 2012 through 2016, compared with 6% for their smaller rivals, according to A.T. Kearney.
Food companies in recent years have revamped old-line brands to cater to evolving consumer preferences. Nestlé cut sugar in its Nesquik chocolate-drink mix and fat in frozen dinners. General Mills removed artificial food dyes from its Trix cereal. Kraft Heinz has scrapped added nitrates from its Oscar Mayer hot dogs and removed artificial dyes from its macaroni and cheese, to meet consumers’ “changing needs through product renovations,” a spokeswoman said.
Big companies also say they are trying to better compete with inexpensive store brands by ensuring their food tastes better and can promise health benefits that make them worth the extra money.
The moves are coming late for consumers such as Megan Dart, a 37-year-old mother of four in the Houston area who says she grew up on General Mills’ Hamburger Helper and Kraft’s Kool-Aid but now prefers fresher food for her children.
“Velveeta. I don’t even know what that is,” she said, adding that the ingredients in that Kraft cheese don’t seem “real” to her. Instead, she buys a block of cheese made by an Oregon dairy cooperative. “We don’t do pre-made meals, no microwave meals.”
When she does buy packaged food such as frozen waffles, she turns to her local grocery-store brand as long as it tastes as good. “If I’m going to buy it,” she said, “I would rather save the money.”
Through most of the 1900s, big brands were in tune with Americans’ desire for safe and affordable food. Innovations such as flash-freezing made packaged food convenient. Preservatives and artificial coloring made it appealing and cheap, without risk of food-borne illness. Packaged foods enjoyed prime shelf space at grocery stores and won over consumers with national advertising.
“Back then,” said food historian Andrew Smith, “they could advertise and promote their way out of a problem.”
In the 1990s, changing perceptions of what counted as healthy spurred consumers toward more natural, organic food, Mr. Smith said. U.S. regulators began requiring nutrition labels on packaged food, leading to more scrutiny by customers.
When the push for fewer artificial ingredients and additives gained momentum, big food companies largely decided to wait and see whether it would become mainstream, he said. “They ignored the concerns, and they stopped experimenting because they could buy aisles in the grocery store.”
From 2005 to 2010, a swath of new brands such as Amplify Snack Brands Inc.’s SkinnyPop popcorn and Kind LLC’s Kind snack bars hit shelves, rapidly expanding from a few small stores to retail giants such as Costco and Wal-Mart.
Smaller brands were more focused on making food with simpler, more natural ingredients, said Chris Morley, president of food and retail research at market-research firm Nielsen. Such “clean-label” products, he said, have been the biggest growth drivers of the packaged-food and beverage industry in the past five years.
Some old standbys haven’t fared as well. Hamburger Helper, and the other Helper varieties owned by General Mills, declined to 40% of sales of dinner mixes in the U.S. last year from 61% in 2007, according to market researcher Euromonitor, and Conagra Brands’s Chef Boyardee’s share of shelf-stable ready-meal sales fell to 23% from 25%.
General Mills said Hamburger Helper might not have robust growth prospects but generates consistent profits and feeds millions of Americans. It improved the taste by using real cheese and, to attract value-oriented shoppers, has added 20% more pasta, a spokeswoman said.
Conagra said it is focused on reviving brands with the most potential, such as Healthy Choice frozen dinners. It said it would sell brands that aren’t core to the business, such as Wesson cooking oil, and it has acquired trendy brands such as Frontera salsa. Frozen dinners by Frontera hit shelves within 120 days of creating the recipe, much faster than the typical two-year innovation cycle, a Conagra spokesman said.
The web and social media gave smaller food companies a direct path to consumers’ hearts, minds and stomachs. They gained traction through blogs and Facebook with little marketing spending, selling food online via Amazon.com Inc. or their own websites long before they would have been able to get it in stores.
Among American households, 23% bought groceries online last year, up from 19% in 2014, according to Nielsen and the Food Marketing Institute.
Big brands can no longer control perceptions about food with television advertisements and shelf placement. “In the good old days, the retail shelf was an important barrier to entry,” said Nestlé CEO Mark Schneider at a Berlin conference in June. Today, the “endless shelf” of the internet means smaller companies can easily enter the market, he said.
Big food companies say they have also been hurt by economic trends in the U.S. that have slowed some consumer spending in recent years.
The inertia of big food firms made it easier for them to lose market share when eating trends changed, said Beth Goeddel, who spent 16 years in marketing for Kraft brands such as Oscar Mayer before it was acquired in 2015. “It’s easier to be nimble when you’re smaller, and you have nothing to lose,” said Ms. Goeddel. She now works for an artisanal chocolate company.
Macaroni and cheese is a case in point. Kraft’s version made its debut in 1937 when America was in the throes of the Great Depression and was popularized for its ability to serve a family of four for 19 cents, the company said.
When people started looking for fresher options in the new millennium, brands like Annie’s Homegrown all-natural pasta gained at the expense of mainstream brands. From 2012 to 2016, Kraft lost 2 percentage points of market share in mac and cheese, according to Euromonitor.
Kraft Heinz said that since it announced last year it had removed artificial dyes, sales and market share improved.
Unilever PLC is trying to sell its margarine brands—the foundation on which it built its business starting in 1929—after a takeover offer from Kraft Heinz sparked a strategic overhaul earlier this year. Over the past decade, butter regained favor as a natural option and margarine sales fell. Unilever recently kicked off a restructuring program aimed at making it more responsive to consumer trends.
Nestlé, the world’s biggest packaged-food company, was singled out by billionaire activist investor Daniel Loeb for having fallen behind “due to changes in consumer tastes and shopping habits, as well as an influx of new competition from smaller, local brands.”
Nestlé had said in June it was looking to sell its U.S. confectionery business, which includes the Butterfinger, Baby Ruth and Crunch candy bars. Last week, following Mr. Loeb’s letter, it added that it would invest in high-growth businesses such as bottled water and infant nutrition instead.
Companies, while adjusting some big brands to new realities, are adding new lines as well.Campbell Soup Co. said it is removing artificial colors and flavors, and recently came out with a new brand of soup made with simple ingredients, because health-and-wellness foods have “the most compelling growth opportunities in the food industry,” a spokeswoman said.
General Mills, after it failed to regain ground lost to Chobani, recently launched a French-style line of yogurt.
Several big companies are acquiring faster-growing brands. In 2014, General Mills bought Annie’s Inc., maker of Annie’s Homegrown, and expanded it to new products such as yogurt and soup. In 2016, Danone SA, the giant yogurt company, agreed to buy WhiteWave Foods Co., which makes Silk soy milk and Horizon organic yogurt, saying the deal would help it offer consumers healthier choices.
Kellogg Co., General Mills and others have directly invested in food startups through venture-capital funds that they say will give them insight as to how to respond better to evolving trends.
“Size alone,” said Nestlé’s Mr. Schneider at the conference, “does not protect you from the winds of change.”