Trend by Walter Rach, Managing Director, Food & Beverage Practice
Expectations for the Food and Beverage Industry in 2012
Oftentimes, looking into a crystal ball to determine business predictions produces a cloudy image, particularly in uncertain economic times. Cutting through the fog, however, I offer the following expectations for the food and beverage industry in 2012…
Continued growth of Private Label
Slowly but surely, private label has grown in terms of sales and prominence at retail grocers and I don’t see that trend changing in the new year. As estimated by the Private Label Manufacturers Association, annual private label food and beverage sales likely exceed $100 billion currently, indicating that the category has garnered the trust and acceptance of many consumers. Previous consumer impressions of lower quality private label products have been fading away steadily as the quality, taste and marketing of these items have been consistently improving. Consumers who turn to private label products in difficult economic times will not necessarily return to the branded counterparts when conditions improve as long as they are satisfied with the private label offering. Private label food and beverage products have also been produced and marketed in different tiers, ranging from premium to more value-oriented offerings. Retailers often see the development of a corporate private label marketing strategy as a major way to differentiate themselves from the competition. Considering all of these trends – coupled with a still uncertain economy – the prediction is for increased growth and prominence of private label food and beverage products in the new year.
As a countermove to P/L growth, branded companies will strive for greater innovation or differentiation
The growth of private label food and beverage products hasn’t been easy because branded manufacturers haven’t gone down without a fight. They will continue with aggressive countermeasures next year as well. Realizing that iconic brand names have great value and are extremely difficult to develop, many branded manufacturers are taking an aggressive leadership role by extending these well-recognized and trusted brand franchises through product innovation and differentiation. Recent examples such as Pepperidge Farm breaking ground on new $30 million, 34,000 square foot innovation center and General Mills announcing the overall improvement of the health profile of their product line are indicators that many branded food manufacturers will continue to reinvent their brand franchises in 2012 to combat the growth and prominence of private label.
Restaurants will continue to struggle in 2012
Historically, growth or decline in eating away from home has typically mirrored the overall performance of the economy and, since I haven’t seen much indication of a significant improvement in the U.S. economic forecast for next year, I expect the restaurant industry to be in for another tough year in 2012. In response, , expect restaurant owners to aggressively stress innovation to differentiate themselves from competition in order to grow by gaining market share in an overall declining or stagnant sector. Pressure to hold down prices from restaurant owners to food and beverage manufacturers will again be strong in 2012 and the success of this tactic will be largely determined by overall commodity prices. A personal suggestion might be the consideration to reduce portion sizes, which are oftentimes unnecessarily large, in order to better control costs.
Progress made in 2011 regarding nutritional awareness will continue in 2012 as long as the messaging remains consistent and simple
Obesity and poor eating habits are major issues in the United States and statistics show that this situation is worsening each year. These concerns has been prominently addressed by the current administration, government agencies, food and beverage manufacturers, industry organizations as well as concerned individual citizens and possible solutions have been presented. One such solution – improving the presentation of nutritional and dietary information to consumers – was addressed in a trend article I wrote earlier this year. Initiatives on this issue introduced in 2011 include the replacement of the decades old “Food Pyramid” with the much easier to understand “My Plate” and front-of-the-package labeling proposals such as “Nutrition Keys” (since re-named “Facts up Front”) appear to be solid solutions to improve nutritional awareness for consumers. However, as stated in my trend article, the continued success of initiatives such as these in 2012 and beyond will greatly depend upon the ability of the message to stay consistent and simple. Too much change and added complexity will confuse consumers and they are likely to either ignore the messages or draw erroneous conclusions from them.
2012 will be an active year for M&A activity in the Food and Beverage industry
Following up on what was a fairly active year for M&A transactions in the food and beverage industry during 2011, I predict that this trend will continue on in the new year. With relative stability in terms of growth and the ability to generate cash, food and beverage companies are typically “on the radar screen” of most private equity firms as attractive acquisition prospects. As for strategic buyers, an acquisition may be an effective way for a company to accomplish something “substantial” in a climate of slow but steady growth. One acquisition strategy that I believe will continue to be popular next year is where a company acquires another’s non-core brands. This allows the seller to receive cash while the buyer can breathe new life into these “orphan brands” – a strategy that has worked quite well for companies such as J.M. Smucker and B&G Foods.
Many of these acquisitions will struggle unless proper attention is paid to cultural fit and integration
I plan to delve into this topic in greater detail with a trend piece in Q1 of 2012, but in my observations of over 25 years of executive search experience for the food and beverage industry, I would say that this is one of the major problem areas for acquisitions – particularly in the short term. If key employees of both the acquirer and the company being acquired are valued and expected to be contributors in the new company, close attention to cultural fit and integration is essential.
Many large food and beverage companies will experience significant change in 2012
Three examples:
1. Kraft
It has already been announced that the company will split into two independent public companies sometime in 2012 – Global Snacks and North American Grocery. The stated reason for this is to drive greater growth and innovation, particularly in Global Snacks. For growth and innovation to occur, however, I believe the culture and organizational structure needs to be changed first into a more forward thinking, decisive and nimble organization. My suspicion is that one of the main results of the spinoff will be the added ease of selling off major brands (particularly belonging to the North American Grocery business), which I predict will begin to occur in late 2012 or 2013.
2. Con Agra
After three unsuccessful attempts to acquire Ralcorp in 2011, Con Agra’s interest in the private label space will continue and the company will make a major acquisition (or several smaller ones) of a private label manufacturer in 2012. Con Agra, which currently produces some private label products, obviously sees private label as a good growth avenue.
3. Sara Lee
Sara Lee was almost sold off in early 2011, but instead decided to split into two companies – International Coffee & Tea and North American Meats. In late 2011, the organization parted ways with C.J. Fraleigh, CEO of North America, sold off its domestic food service coffee business to J.M. Smucker and announced that they are searching for a new Chicago area headquarters for the Meat business. My prediction is that “MeatCo” (which has some strong brand names) will be sold off to another organization in 2012, thus ending Sara Lee’s domestic presence.
With that, I shut down the crystal ball. We will see how omniscient I was come this time next year…