It’s OK to be selfish: In the food industry, market share is everything.

Jonathan DeVito » jdevito@pivitasresearch.com

 

People have been eating forever.

Demand is stable in the food industry. Everyone needs to eat.

The downside is that, although people need to eat, most aren’t going to exponentially increase their caloric intake year over year. As a result, most food suppliers that grow aren’t substantially expanding the amount of food we consume. For the most most, their growth is mainly attributable to taking share from competitors and/or categories.

While the food industry may be a share conversion environment, many seem to be out touch with this dynamic. First and foremost, many firms simply aren’t fighting hard enough for share. R&D spend in the food industry tends to significantly trail other industries and many firms promote new products via antiquated features and benefits marketing. Some firms have looked to corporate development and venturing to drive growth, but these activities don’t comprise a silver bullet either. Acquiring upstart food businesses may look promising, but it’s difficult (although not impossible) for most businesses to achieve rapid scalability in an industry that is fundamentally built on fighting competitors for share.

Successful firms will be those that shift their perspective from seeking industry growth to identifying winnable battles for share conversion. The following article discusses this dynamic along with key implications.

 

How much are people eating?

One of the issues facing food industry growth is that the market is fundamentally tied to how much people are eating. People aren’t likely to exponentially increase the amount of food they eat each year. The tables and charts below illustrate this dynamic by outlining changes in caloric intake per capita between 1970 and 2010 (see below, click charts for higher resolution):

 

Putting the above in perspective, on a per capita basis the typical American’s daily caloric intake (excluding alcohol and discretionary variation) rose by over 18% between 1970 and 2010. This may seem like a large amount, but it is only +.43% per year.

It is also important to differentiate  food consumption and food supply. The American food oversupply has steadily increased over the preceding decades (see chart below).

The gap between food supply per capita and consumption per capita increased over 24% (.55%+ per year) between 1970 and 2010. This surplus is likely a combination of non-utilized food as well as purchased food that is subsequently discarded. Regardless, the gap between food supply and food consumption has steadily grown over the preceding decades, further providing evidence that the food industry is already highly saturated.

 

Retail vs. foodservice: assessing growth

It is important to distinguish between retail and foodservice channels when assessing the nuances of the food industry. Most notably, the overall American food spend has essentially flipped over the preceding decades. In 1997, food at home (FAH) comprised over half of food spending in the US. By 2010, food away from home (FAFH) comprised the majority of US food spending.

From a manufacturing standpoint, the above is an interesting development. Since FAFH consumer purchases tend to be substantially more expensive than FAH purchases, eating out makes a big impact on dollar market shares, but little impact on food consumed. For example, in 2017, approximately 80% of calories consumed in the US on a daily basis are derived from FAH purchases, but FAH held under 50% of the American food spend. This may indicate commoditization or deflationary pricing in retail food: retailers are losing dollar share, but still supply the vast majority of what we actually eat. For more information, see the charts below.

A line chart showing total food-at-home and food-away-from-home expenditures for 1997 through 2017.

Lastly, the increase in money spent on eating out doesn’t necessarily let foodservice manufacturers off the hook either. People may be eating out more, but foodservice is still, as compared to retail, a much smaller market in terms of units sold by suppliers. Eating out may be more expensive than cooking at home, but much of that premium goes to operators for putting the “service” in foodservice, not to firms supplying ingredients.

 

Thoughts and implications

To win in the industry, many suppliers will need to reassess their R&D, marketing, category management, and corporate venturing strategies. Each of these topics, along with recommendations, are highlighted below:

 

»Spotlight on R&D:

One might think a cannibalistic environment centered around share conversion would mean that food and beverage manufacturers would be investing heavily in R&D. The rationale being that firms should continuously be innovating across product categories to take share from their competitors. However, this isn’t the case. In fact food & beverage firms’ R&D spending tends to trail significantly behind most other industries, typically comprising the equivalent of 2-4% of revenue, compared to 5% across all industries covered in the 2018 Strategy& Innovation 1000 report.

Also, R&D shouldn’t simply be viewed as supporting share conversion through the introduction of competitive products. In some cases, firms will need to invest in R&D to maintain market share. I’ve previously compared this dynamic to the decline of products featuring partially hydrogenated oils. Long before the FDA banned PHOs, many firms had already reformulated their products. Over time, being PHO free simply became a point of credibility so consumers wouldn’t be scared away from products. In other words, what was once a differentiator became a base expectation.

On another note, R&D may actually be a higher order consideration in foodservice than it is in retail. While R&D is important in both channels, foodservice is heavily driven by product performance with less maneuverability via creative messaging. The functional buying environment of foodservice may be one of the reasons for the high growth of provide labels across the channel.

 

»Seeking out deeper consumer needs: 

Features and benefits are frequently an over-emphasized component of retail food and beverage branding. Whether it’s all natural, organic, sugar-free, whole grains, the critical challenge with food products in retail often isn’t product attributes in and of themselves (unless it’s removing ingredients that are deemed hazardous or pose some type of immediate risk). In fact, many consumers may not actually have a deep understanding of what these labels actually mean (for more on this point, see the previous better-for-you article).

As I’ve mentioned in the past, Chobani is a good example of how being meaningfully different can increase profits and market share (see past article discussing “meaningful” differentiation). Their products do have some elements of functional marketing (more protein, less sugar, etc.), but it isn’t likely that the firm has risen to prominence because of these reasons alone. A myriad of other greek yogurt brands purport these same attributes, including private labels. What makes Chobani stand out is its emphasis on wellness, purpose, and transparency (see the Chobani website). While offering products with less sugar or more protein supports Chobani’s purpose driven identity, the firm’s identity is ultimately bigger than the sum of its features and benefits. As for the results, Chobani’s success speaks for itself: it’s now the number one US yogurt brand and continues to grow its market share.

It’s also important to note that a brand doesn’t need to be healthy, natural, or clean label to leverage soft factors for its branding. In fact, the product itself may not need to change much at all. It isn’t strictly a food example, but Pabst Blue Ribbon (PBR), a price fighting beer that’s experienced a resurgence over the past 10-15 years, is a good example of purpose, meaning, and cultural relevance in CPG marketing. Although the beer isn’t a “craft” or “artisan” beer, the firm has positioned itself as a retro-chic, art-inspired, hipster millennial brand with great success. The firm’s annual volume rose from around 140 liters per year in 2004 to approximately 350 in 2013. This is especially interesting that much of this growth occurred against a backdrop of challenging market conditions: 65% of alcohol consumed by 21-27 year olds in 2006 was beer, compared to 43% in 2016 and the percentage of alcohol consuming adults that cited beer as their preferred beverage declined from 39% in 2004 to 36% in 2013.

 

»Realigned corporate venturing:

Unlike some industries, the food industry isn’t creating new hyper growth markets. In a share conversion environment, you need to take food off another firm’s plate to make money.

The unique constraints of the food industry and food economy may present limitations for corporate venturing. While upstarts may offer opportunities to get a foothold in new categories, acquired firms will still, almost inevitably face challenges as they battle with competitors for share. Even in the best of circumstances, acquirers shouldn’t assume that targets will grow in an unopposed environment.

Moreover, some smaller food firms may succeed because they are small, not in spite of it. For example, a small, local producer of juices may be attractive to consumers in a particular market because it is not a big, impersonal brand. Once acquired by a larger business, the acquired firm may lose the marketing benefits of being small. Ultimately, we may be facing a future where increasing industry share is absorbed by a sea of small producers with limited scalability, each with minimal ability to control large amounts of market share.

Another issue associated with scaling small firms is that their products have usually only been proven to be viable on local or regional levels. Buying a firm that’s popular in a certain part of the country doesn’t mean that its products will be readily received in other markets. As an example, this was cited as one of the challenges when Campbell’s tried to scale Garden Fresh Gourmet, a regional brand that Campbell’s incorporated into its Campbell’s Fresh division (see previous article discussing better-for-you foods).

All in all, the points above don’t mean that corporate venturing is ineffective, but they do mean that acquirers should carefully consider what their goals are and whether or not their expectations are aligned with attainable opportunity. Rewards may be high, but de-risking in corporate venturing is equally important.

 

Conclusion

The food industry is a large and stable market. However, industry growth is somewhat limited since consumers (on a per capita basis) are not likely to seismically increase their food intake each year. As a result, many suppliers should consider shifting their focus away from seeking industry growth and towards finding opportunities for share conversion.

In many cases, achieving share conversion will require reevaluating R&D and product marketing strategies.Corporate venturing may offer opportunities to gain access to new categories, but acquirers should tread lightly given the challenges associated with scaling emerging businesses in a mature, share-conversion oriented industry.

While it may seem dismaying to look at the industry as a slow and steady giant, there is actually plenty of opportunity for ambitious firms. The food industry comprises many large categories with players that have been slow to reinvent their approach to innovation. Those that can dig deeper, keep an eye to the future, and take advantage of others’ slow reaction times may find that there is plenty of market share for the taking.

 


About the author:

Jonathan DeVito is the Founder of PIVITAS. He works with a diverse group of clients to help them develop actionable product and pricing strategies.

*Please note, the original version of this article cited 2014 as the most recent year for USDA ERS data on caloric consumption per capita. This has been corrected to 2010 along with related calculations. Charts, data, and descriptions for FAH and FAFH data points have also been revised.

Featured Image: Pacman, an approximate embodiment of share conversion mentality. Source: MaxterDesign/SHUTTERSTOCK.COM.