Food giants’ sales slide as millennials lead shift toward niche brands.
Star Tribune
by Mike Hughlett
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Breann Tierschel has expelled Lucky Charms from her family’s table in favor of oatmeal.
The 30-year-old accountant, who lives on St. Paul’s East Side with her husband and young daughter, has reconstructed her family’s eating plan over the past six months. Carbohydrates and sugars are out, proteins in. She said she’s buying a lot of “fresh” hamburger, whole chickens and turkey.
It’s all part of a more healthful approach to food, Tierschel said. “We need a change on what we put on our table.”
Shoppers across the United States are spending more time on the supermarket’s periphery — home to meat, fresh produce and dairy goods — and less in the center aisles, where processed foods rule. They’re piling on protein, moving toward organics, buying more niche brands — all in the name of what the food industry calls “wellness.”
General Mills and other packaged food companies are feeling the effect, as sales stagnate and profits come under pressure. While industry executives say the anemic U.S. recovery continues to sap consumer buying power, a fundamental change in customer tastes also looks to be at work.
The vanguard for this food movement is younger adults like Tierschel. “The millennials are more concerned about food and nutrition,” said Alexia Howard, a stock analyst who follows the packaged food business. “The younger generation doesn’t seem to have the loyalty to big consumer brands.”
Jeff Harmening, chief operating officer of General Mills’ U.S. retail foods division, rejects that notion. But he acknowledges the challenges facing Golden Valley-based General Mills, one of Minnesota’s most prominent companies. “Consumers’ food values are changing.”
The latest evidence could be seen last week in General Mills’ second quarter earnings. U.S. retail sales were down 4 percent compared with a year earlier, and operating profits for that business fell by 10 percent.
To cope with weak sales, packaged food companies are trying to both increase innovation and slash costs. General Mills is closing two plants, one each in California and Massachusetts, erasing about 575 jobs. The company is also cutting 700 to 800 mostly white-collar workers.
General Mills, with about 5,000 employees in the Twin Cities, has declined to comment on the extent of those cuts locally.
There could be more fallout for food firms. When an entire industry is pinched, mergers and acquisitions often follow. “Whenever you see a slowdown on the top line, you see more deal-making,” said Howard, of Bernstein Research.
General Mills earlier this year paid $820 million for Annie’s Inc., best known for its organic and natural mac and cheese. The deal boosts General Mills’ own organic business, which includes the Cascadian Farm brand. And the purchase plays right into changing consumer tastes.
“I’m glad they did that. I’ve been buying Annie’s for years,” said Craig Fink, a 46-year-old business owner in Pequot Lakes. “With two kids, you go through a lot of mac and cheese. Annie’s pretty much replaced Kraft for me,” Fink said, referring to Kraft Foods’ famous cheesy boxed dinner.
Studying food labels
Fink is the sort of consumer who is changing the playbook for companies like General Mills and Chicago-based Kraft. “The more I learn about food, and how we get our food, the more I change what I buy for myself and my kids,” he said.
Fink said his family has cut out soda pop and started buying more organic food, particularly meat. And Fink is paying more attention to what’s in his family’s food. “I’ve learned about reading nutrition labels,” he said. “If (a product) has got 52 things in it, that’s not good.”
Casey Wojchik, communications coordinator at a Minneapolis law firm, is a label scanner, too. The married 34-year-old said he grew up eating “Hamburger Helper, Velveeta cheese, canned spaghetti — the real processed stuff.” He still eats Hormel Chili, a canned classic, but the vegetarian version only; he went meat-free about six years ago.
Wojchik said he gravitates to the coolers and produce displays on the supermarket’s periphery, not the center aisles. “My wife has actually said to me, ‘Don’t shop in the center of the store, most of the healthy stuff is on the perimeter.’ ”
The fresh produce boom has even hurt sales of frozen vegetables, including General Mills’ Green Giant offerings, analysts say.
The frozen category is still a big one, and it’s not declining significantly, said General Mills’ Harmening. Still, he said, “people are going more to fresh.”
A report by analyst Howard showed that fresh produce was one of only three supermarket food categories — out of 13 surveyed — that registered an increase in consumer consumption over the past five years.
“It seems that we have recently hit some sort of tipping point, whereby demand for heavily processed foods is tapering off, while demand for healthier and simpler products is picking up,” according to Howard.
“The problem,” she said, “is a lot of these (processed) products are very profitable.”
Shift toward snacking
At the same time, General Mills has benefited from the rise of snacking — particularly more healthful snacks.
“If you look at the past 25 years, you will see a steady increase in snacking to the point today where snacking outweighs meal occasions,” Harmening said. “And if you look at our snack portfolio, our Nature Valley and Fiber One [snack bar] businesses have been doing particularly well over the past few years.”
Indeed, General Mills’ snacks operation is the brightest spot of its U.S. business.
The rising demand for protein-rich food is another big trend. But its effect on packaged food companies can vary.
Austin-based Hormel foods has benefited, because it gets the majority of its sales and profits from myriad pork products and its Jennie-O turkey line. At General Mills, new protein-fortified products like Cheerios Protein cereal and Nature Valley Protein Bar have been hits.
But as consumers clamor for protein, they’re cutting back on food heavier in often-maligned carbohydrates. And that’s not good for General Mills, Michigan-based Kellogg and other diversified packaged food companies.
“Consumers’ wellness goals have pushed them away from conventional grain-based foods,” according to a report by David Palmer, a food industry analyst with RBC Capital Markets.
Cereal is as conventional and grain-based as they come, and it’s General Mills’ single biggest U.S. business.
U.S. cold cereal sales have been declining or flatlining in recent years. Even flagship products — like General Mills’ Cheerios, the nation’s number one cereal brand — have seen sales fall significantly the past year.
Consumers have more alternatives to cereal at breakfast nowadays, and many are rich in protein. Eggs, once seen as a cholesterol trap, have made a comeback. Greek-style yogurt, known for high protein, has captured almost half of the U.S. yogurt market in less than a decade.
General Mills knows that all too well: It was late to the Greek market and sales of its Yoplait traditional yogurt got hammered. The Greek yogurt market has been driven by Chobani, an upstart brand.
Success of smaller brands
Chobani’s rise is emblematic of the growing power of millennials — 18- to 34-year-olds — in the packaged food market, and of the Internet as a marketing tool.
Chobani netted more growth from millennials than older generations during the past five years, according to a report by RBC’s Palmer. And Chobani ranked second of the top 15 brands with the highest growth rates among millennials, the report said.
Tierschel, of St. Paul’s East Side, switched to Chobani from Yoplait.General Mills has developed a Greek yogurt that’s getting traction in the market, but Tierschel hasn’t switched back.
“Once you are loyal to a brand, you just kind of get stuck on it,” she said.
Chobani, as well as Annie’s, are among a new generation of niche brands that have become staples. They are “eating the lunch of mainstream packaged food,” analyst Howard wrote in a July report. And they have done so through low-cost digital marketing and social media.
Chobani, for instance, took to Facebook and YouTube early on to spread its message. Meanwhile, food bloggers often pick up on niche products like Chobani. “Social media, Twitter and blog sites are changing the way millennials and young moms are getting information on what to eat and what not to eat,” Howard said.
In this electronic-word-of-mouth era, the national TV ad — long the prime forum for packaged food giants — doesn’t have the force it once did. Such expensive ads once created a big barrier to entry into the packaged food business, but no longer, Howard said.
Of course, big food companies like General Mills know that, and they’ve boosted their own social media and digital advertising efforts. Millennials are their target. “The millennial generation is really important,” said General Mills’ Harmening.
“You’ll find that millennials have an influence over Generation Xers and their boomer parents.”
Mike Hughlett • 612-673-7003
