When such a large food company as Kraft Heinz provides us with such a brutal quarterly report, we need to look deeper into what direction the industry may be taking.
While Kraft Heinz’s particularly gloomy earnings results, which include a $15 billion write down to accommodate the declining value of several of its brands, is really in a class by itself here, it may also be seen as the proverbial canary in the coal mine, and this canary is looking pretty ill lately.
While other food companies may be faring better, at least right now, and so far, this issue may seem particular to Kraft Heinz, if the issues that are plaguing them are ones that the industry as a whole may be susceptible to, we’ve got a bigger story here than the tribulations of a single company.
It is not as if we’re in any sort of economic downturn that has people not being able to afford to spend as much money on food and substituting these iconic brands with cheaper options, and if that was the case, we could just pass this off as something cyclical and perhaps not be as worried about it.
When we look deeper into what might be behind this, it turns out that these popular brands are being substituted more and more with other brands, not so much on price but due to the changing dynamics of the food industry, and the consumer products industry as a whole as well.
To understand how we got there and where we may be going, we really need to look back at what we could call the glory days of these brands, in the quaint old days where there were only three major TV networks in the U.S. and both advertising and the media were far less fragmented.
The marketing that has gone into these brands over the years has been colossal, including both with advertising and at the supermarket level, and all that money bought armies of consumers who became loyal to the various brands that these companies marketed. You also need to maintain a certain level of quality, but if you had that and you had the brand loyalty, you were really on to something, and a consumer may just buy your products for years and never even seriously consider another brand.
Since competing against these famous brands required that you be able to spend on a similar scale, this also restricted the number of competitors. While off-brands did exist, they mostly appealed on price and did not play that significant of a role as most people preferred to pay a little more and buy the premium brands, whether they were actually that premium or not.
The Internet Has Been a Real Game Changer with Food as Well
The information age then stepped in and changed all this. The number of ways that you can reach people with marketing messages has exploded, and this has served to really fragment the industry. We went from a quasi-monopoly market to one that is much more open and accessible to competitors, and the amount of selection and the degree of specialization has expanded in turn.
This also brought on a change in culture, where our minds have been opened up a lot to seriously rethinking our brand choices, and not just assuming that better known or more expensive is automatically better. With more things to try and more people willing to try, the home field advantage that a company may have spent decades nurturing, such as that of Kraft cheese or Heinz ketchup, is becoming more and more diluted.
Perhaps even more noteworthy, these new brands and new companies have taken well advantage of specialization, such as those seeking lower fat choices, gluten free, more organic or natural, keto, or what have you, and these companies have taken the lead in serving these new demographics, while the old guard has not been able to adapt their businesses to these changing preferences as quickly.
When we see a $15 billion write down on brands such as Kraft and Oscar Mayer, due to their deteriorating value, it is because they are no longer in a position to command the market share they once had, and this is more telling than what it says about these two particular brands.
Rather, it is reflective of the way the food business is trending, away from people just flocking rather mindlessly to the brands they know and trust, toward a more open sampling of a lot of other things, brands that can now reach them more effectively with today’s media.
More Competition Means You Have to Adapt or Lose
This increased competition has also affected the stock prices of these big food makers, which are headed in the wrong direction lately. On average, they have declined 30% over the past two years. As disturbing as this figure is, there does not seem to be much evidence to have us think that this downward trend will be over anytime soon.
When we use price to earnings ratios to decide between stocks, and especially if we use price to projected earnings, it should not matter so much what business the company is in, because earnings are earnings. However, we’re seeing food companies take a real hit here, and we have seen this ratio drop to 14, when it was above the market average of 20 not long ago.
These ratios are far from the only thing investors look at of course, but probably the biggest differentiating factor is a company’s medium to longer-term outlook, and the food business is not getting very good grades on this count lately.
They do say that in the business world, you are eventually faced with the decision to either adapt or die, and we’re talking about companies who really haven’t had all that much to do historically to keep their positions. This can lead to some real complacency, although we’re starting to reach a time where they may not be able to get away with so much of it.
Niche brands and private labels are the ones that are growing, at the expense of more traditional and established brands. The market share of the top 20 packaged food companies is continuing to decline, and they now only control 42% of the market.
The movement toward online shopping is accelerating this loss, and this is where major brands are particularly vulnerable. Without the merchandizing deals with supermarkets that they are accustomed to, where the playing field has truly been leveled with a service like Amazon, 70% of the top 20 food and beverage items on Amazon are made by start-up companies.
The packaged food industry itself is also in decline, at least the traditional ones, as more and more people are seeking out what they consider are healthier choices. These views are being perpetuated more and more on the internet, and the backlash is growing.
If we assume that little changes in the food business, we might think that the major packaged food brands will surely prosper forever in their current form, and think that the markets have over-reacted to their perhaps struggling a little lately. When we look at the bigger picture though, this may be part of a bigger problem facing them and they may need to enact some big changes to how they do business if they wish to continue to have the strong presence in the marketplace that they have become accustomed to.