KANSAS CITY — During the first nine months of 2017 three separate events cast a bright spotlight on the dramatic transformation taking place in retail — Amazon embraced brick and mortar and acquired Whole Foods Market, the German hard-discount chain Lidl opened its first US locations, and the Kroger Co. announced plans to open a restaurant.
Many of the headlines during 2017 have been about the tepid growth the leading food and beverage companies have experienced the past few years, but even more compelling is how competitive and fragmented the retail market has become. As competition has increased, retailers are adopting strategies to compete, whether it is focusing on price, offering distinct private brands, introducing more fresh choices or enhancing e-commerce capabilities.
“…There is no denying that the retailer landscape is changing dramatically with the emergence of new players, new store formats and evolving business models,” said Denise Morrison, president and CEO of the Campbell Soup Co., Camden, New Jersey, during an Aug. 31 conference call to discuss the company’s fiscal 2017 financial results. “Several variables are at play, including value players expanding their presence in the US, the growth of store brands and the explosion of e-commerce and meal delivery services disrupting the market. We expect conditions to remain hypercompetitive for the foreseeable future.”
The hypercompetitiveness referenced by Morrison is forcing retailers to become more demanding on margins. In the Aug. 31 conference call, Morrison modified Campbell Soup’s fiscal 2018 financial outlook for its soup business because it failed to come to an agreement for a promotional program with a large retail customer.
“We expect this will negatively impact our US soup sales with this customer, particularly in the first half,” she said. “Accordingly, we now expect our soup sales to decline in fiscal 2018.”
During a Sept. 6 presentation at the Barclays Global Consumer Staples Conference in Boston, John Bryant, then the chairman and CEO of the Kellogg Co., Battle Creek, Michigan, relayed a story similar to Morrison’s.
“…As hard discount has impacted certain markets around the world, and as e-commerce impacts markets around the world, we do see some traditional retail put more pressure on margin,” he said. “And a result of that is we work together with our retail partners so we can both win in the marketplace. And at times, you take a (bus stop), at times you take a customer dispute.
“We had one earlier in the year in Europe around Pringles. Pringles declined pretty significantly in the first half of the year. It’s back to growth in the back half of the year. The right long-term solution is to work with your retail partners. But if you have to take the dispute, you take the dispute and you move forward.”
Richard Vitaro, managing director of the Berkeley Research Group, Emeryville, California, said consolidation among the top 10 retailers in the United States will continue to pressure food manufacturers.
“This puts two different kinds of pressure on food and beverage companies — dealing with greater purchasing leverage from dominant retailers and managing greater complexity from channel fragmentation,” he said.
A challenge facing the food and beverage industry is tracking retail sales as the market becomes increasingly fragmented and competitive.
“With the changing retail landscape, measuring consumption is not as simple as it used to be,” said George Zoghbi, chief operating officer of the US commercial business for the Kraft Heinz Co.
During an Aug. 3 earnings call he was asked about Nielsen data showing sales volume down for snack nuts, shelf-stable juices, coffee and powdered beverages. He said the Nielsen data mentioned were covering traditional retail outlets and some mass merchandisers and club stores, but the data were not covering hard discounters, some big club players and almost the entire e-commerce channel. E-commerce sales at Pittsburgh-based Kraft Heinz, although they make up about 1 percent of total sales, are growing at a 60 percent rate, he said.
Online sales make up less than 3 percent of total food and beverage sales, and the percentages vary by category, said Sam Gagliardi, senior vice president of e-commerce for Information Resources Inc., a Chicago-based market research firm. More coffee, for example, is being bought on-line, not just by consumers but also by companies wanting to stock their offices, he said.
US retail ground coffee sales were $9,451 million in the 52-week period ended July 9, down 0.3 percent from the previous 52-week period, according to IRI data covering supermarkets, drug stores, mass market retailers, military commissaries, and select club and dollar retail chains.
“We do not see in-store growth returning here in the foreseeable future,” Gagliardi said of overall consumer packaged goods. “In fact, we largely believe, especially when it comes to food, that most of the sales that are happening on-line are cannibalizing the in-store sales.”
New York-based Nielsen estimates e-commerce sales make up about 8 percent of total consumer packaged goods sales, said Jordan Rost, vice president of consumer insights.
“With foods and beverages, it’s a little bit lower than that,” he said.
“I think where we have seen some of the early developments with food and beverages in particular are with center-store categories, generally the packaged foods,” Rost said. “We see particular development in the snacking categories — so nuts, crackers, snack bars.”
He added, “The brick-and-mortar trajectory is still trending downward, and e-commerce is growing so fast.”
Welcome to the jungle
Amazon closed on the acquisition of Whole Foods Market on Aug. 28 and promptly announced price reductions at stores throughout the country. Vitaro of the Berkeley Research Group called the acquisition a “game changer.”
“The combination of Amazon and Whole Foods, with revised pricing, combines a best of breed business model for perishables and non-perishables,” he said. “This model delivers convenience and value for non-perishables and quality and freshness for perishables. Further advances in distribution, subscription and convenience will enable this business model to place greater pressure on traditional grocers.”
Additional plans by Amazon for the incorporation of Whole Foods include making Amazon Prime Whole Foods’ customer rewards program available through such platforms as Amazon.com, AmazonFresh, Prime Pantry and Prime Now. Whole Foods’ private brands also will be available through each of the platforms.
A new addition to Whole Foods stores will be Amazon lockers. Customers may have products shipped from Amazon.com to their local Whole Foods for pickup, or consumers may send returns back to Amazon via the lockers.
For food companies, the merger between Amazon and Whole Foods may signal additional margin pressures in the future.
With food companies already reengineering their supply chains and packaging to fit into Amazon’s system, the on-line retailer’s leverage with the companies may increase still further, said Rob Moskow, an analyst with Credit Suisse, New York.
“Both Amazon and Whole Foods have a reputation for being tough customers and are likely to exert significant power over their suppliers,” he said.
Adding to the pressure may be how other retailers respond to maintain competitiveness in the market.
“Other retailers are not standing still,” Vitaro said. “Wal-Mart and Kroger have introduced/expanded click-and-collect options, which appeal to busy consumers. Additionally, Wal-Mart’s acquisition of jet.com has dramatically expanded their omni-channel effectiveness.
“Some regionals have increased their value and store brand offerings, while others have strengthened prepared foods offerings or added in-store cooking events.”
Adapting to change
Additional retail trends that will affect food and beverage companies include consumers continuing to purchase non-perishable items on-line, polarization of the market with value and premium offerings pushing out “middle market, homogenized products,” and decreased demand for processed foods, Vitaro said.
Food companies are rapidly attempting to adapt to the change.
“We’ve been focused on e-commerce, but we are doubling down a bit more than we had in the past with the dedicated team, a reinvestment of additional resources and really partnering closely with our customers,” Michele Buck, president and CEO of The Hershey Co., Hershey, Pa., said in a July 26 conference call with securities analysts to discuss the company’s financial results. “One of the biggest changes I’ve seen in the marketplace is a lot of our brick-and-mortar partners are now really dialing up their efforts on omnichannel. Those click-and-collect and multiple forms of home delivery and then, of course, there are the pure plays out there.
A challenge The Hershey Co. may face in the future is the possibility of diminished impulse buying in the event consumers shop brick-and-mortar retail less.
“The way that we think about the business is, we need to win with growing customers,” Buck said. “Our goal is always to outperform the marketplace and to gain market share so that if there is softness, we get even more of our growth from market share gains. And we’re heavily focused on that because it’s our profit engine.
“At the same time, I would tell you, I think about this marketplace as a time where we have a great core business that we’re going to continue to drive. And at the same time, we have some opportunities to evolve our product and brand portfolio and also to evolve our channel mix to adapt to the changing marketplace.”
Later she added, “What we now want to do is expand our portfolio so that we can participate in even more snack occasions and ensure that we have the right portfolio and channel development to maximize those opportunities.”
Indra Nooyi, chairman and CEO of PepsiCo, Inc., Purchase, New York, said in a July 13 conference call that consumers are rapidly evolving as new retail formats emerge and food and beverage companies must as well.
“ … Virtually every channel is melding aspects of grocery, convenience, food service, meal kits, prepared meals and home delivery,” Nooyi said. “So, with all this change occurring and at an accelerated pace, we can look upon this period in our industry with hesitation and pessimism or with a sense of excitement and optimism.
“We choose to take the optimistic approach because this period offers a once-in-a-lifetime opportunity to strengthen our business and capture new avenues of growth.”
PepsiCo is investing in making changes to its snacks and beverage businesses to capitalize on the growth of e-commerce.
“We want to make sure that our snacks are more shippable, not just in click-and-collect, but more also for deliveries so that the cube efficiency is there,” Nooyi said. “And on beverages, I think there are two issues: One, is the cold delivery of the beverages if consumers so desire ice-cold beverages delivered to them, which I find it hard to believe, but you can never tell. And then how do we make sure that we address this whole delivery of water because beverages are largely water. So we are looking at meaningful innovation, both in snacks and beverages, in order to address the exploding growth of e-commerce.”
Many of PepsiCo’s products are impulse-buy oriented at brick and mortar, but Nooyi sees potential in those products achieving growth online.
“I think the whole e-commerce area is going to be impulse as you see it in a brick-and-mortar store, which then translates to e-commerce, and it becomes part of a replenishment cycle,” she said. “We’ve seen so many virtual reality tools right now. You can actually simulate grocery stores or whatever version of a grocery store you want online. And you can easily navigate the aisles, and just with a click, shop for whatever you want. So, I think in an interesting way, there’s infinite possibilities to create impulse all through technology online.”