At a recent analyst conference, Campbell's Soup (CPB 0.01%) CEO Denise Morrison made a revealing statement about the state of brand-name food companies today.
Explaining why her company is implementing a $200-million annual cost-cutting program and addressing the paradigm shift in the food industry, Morrison said:
We are also confronting profound shifts in consumers' preferences and priorities with respect to food. We are seeing an explosion of interest in fresh foods, dramatically increased focus by consumers on the effects of food on their health and well-being and mounting demands for transparency from food companies about where and how their products are made, what ingredients are in them, and how these ingredients are produced.
And along with this, as all of you know, has come a mounting distrust of so-called big food, the large food companies and legacy brands on which millions of consumers have relied on for so long.
As the CEO of one of the country's most prominent food-makers, with a $15 billion market value and brands such as V8, Pepperidge Farm, and Prego under its umbrella, Morrison is among the best-qualified people to assess the business of food in the U.S.
In the above presentation, the most damning statement may be her reference to the mounting distrust of "big food," which spells trouble for a host of multinational enterprises, such as Kraft, Kellogg, Pepsi, Coca-Cola (KO 0.48%), and McDonald's (MCD 0.68%).
Those companies have all seen sales within their core brands slow and in some cases decline, and the "mounting distrust" of big food and the other changes Morrison cites seem to be a big reason why.
Big Food seems to be the latest corporate bogeyman, joining Big Tobacco and Big Oil from decades past, and the evidence is clear from corporate earnings reports. Domestic soda consumption has been declining for over a decade now as the cola wars of the 80's have given way to greater concerns for the soda giants. Cereal sales have flattened, threatening companies like Kellogg and General Mills. In the restaurant industry, sales at Chipotle Mexican Grill -- which proudly waves its "Food With Integrity" banner -- have soared, while McDonald's just experienced its worst year in a generation.
What's a big food company to do?
Perhaps it's not a surprise that Campbell's has diversified into organic lines. The company has acquired brands such as Bolthouse, Plum Organic, and Kelsen, which have added over $1 billion in annual sales, and Campbell's plans to introduce a line of cold-pressed organic beverages this spring called 1915.
Nearly every other big food-maker has taken a similar tack. General Mills last year swallowed organic food-maker Annie's, while Coca-Cola has grown to house 20 billion-dollar brands by diversifying away from its blockbuster beverage brands such as Coca-Cola, Diet Coke, and Sprite and into healthier niche products like Odwalla and Honest Tea. Coke has also hedged its bets by taking large stakes in growing beverage companies like Keurig Green Mountain and Monster Beverage.
The Golden Arches ain't so lucky
Food-makers like Coca-Cola, General Mills, and Campbell's have the luxury of diversifying into growth areas. Though growth from their core products has flattened, they can use those profits and their marketing and distribution muscle to take over brands like Odwalla or Annie's and take advantage of their growth.
As a restaurant, McDonald's doesn't have the same capability. Sure, the company can diversify its menu, but it's tried that and the results have been mostly disappointing. Salads and wraps make up a minimal percentage of sales; the additional menu items have made service slower, and the constant changes have frustrated franchisees, many of whom seem to have lost faith in the business. McDonald's has promised to simplify its menu, but sticking with the time-tested formula of a Big Mac and fries may not be enough when consumer tastes are changing so quickly.
As Morrison alludes to, all of the big food companies are threatened by consumers' growing interest in fresh foods and knowing where their food comes from. But as a restaurant, McDonald's is most at risk because it is the least able to diversify away from its roots. And that's just one more headache for Mickey D's and the new management team that's about to come on board next month.
