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https://www.wsj.com/articles/so-long-hamburger-helper-americas-venerable- food-brands-are-struggling-1499363414

July 6, 2017 1:50 p.m. ET

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 -0.92% 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.

Mondelez International Inc., which has mostly snack brands, and chocolate
giant Hershey Co. say they have benefited from an increase in people
snacking rather than having three meals a day.

Companies, while adjusting some big brands to new realities, are adding
new lines as well. 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. Campbell Soup
Co. said Thursday it plans to buy Oregon-based Pacific Foods, an organic
soup and healthy-meal company, for $700 million. Campbell CEO Denise
Morrison said she has been focused on responding to consumer demands for fresher ingredients since 2011. “This accelerates our efforts,” she said.

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.”

Appeared in the July 7, 2017, print edition as 'So Long, Chef Boyardee:
Old Food Brands Struggle.


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