Clean label and BFY foods: hype or new reality?
By Jonathan DeVito
Clean label and BFY: A hotbed of activity.
Clean label and better-for-you (BFY) foods are increasingly seen as a major growth engine in the food industry.
Numerous major players have been pouring money into the space, either via acquisitions of product development.
For example, RX Bar, a manufacturer of clean label snack bars, was acquired by Kellogg in 2017 for $600m, 5 times RX Bar’s sales and 30x EBITDA. By comparison, according to FactSet and Harris Williams average multiples stood at 1.6x sales and 10.7x EBITDA across announced food and beverage deals in 2017.
As for product development and introduction, according to Mintel, the incidence of using the word “simple” implying clean label or simple formulation) increased by 50% between 2012 and 2016.
However, is natural and BFY as promising as many would like to believe?
The following article outlines some points to consider.
What’s in a label?
One point to consider is that a large percentage of consumers don’t truly understand the what many labels actually mean.
For example, researchers at the University of Florida surveyed over 1,000 Americans to assess their understanding of non-genetically modified (non-GMO) foods. A surprisingly large proportion of respondents made incorrect assumptions about basic biological concepts. 33% of respondents thought that non-GMO tomatoes did not contain genes and 32% of respondents thought that vegetables didn’t have DNA. In addition, less than half of respondents recognized soybeans and sugar beets as leading genetically modified crops and only 55% of respondents recognized corn as a widespread genetically modified product (according to the authors 92% of corn planted in 2015 was genetically engineered). It may be reasonable to ask how deeply held attitudes surrounding clean label/BFY foods are if many consumers don’t have a real understanding of what these labels mean.
In addition to a lack of knowledge regarding what some food labels actually mean, consumers also tend to not practice what they preach. One example highlighting the gap between buzz and actual dietary habits is veganism. Despite the attention veganism has received in addition to its purported environmental and health benefits, it hasn’t made a serious dent in meat consumption. In fact, meat consumption has been steadily growing by nearly 3% per year since 1960 (see video below) compared with a current population growth rate of just over 1%. As for the US, last year the USDA predicted the US would set a new record in 2018 for meat consumption per capita, surpassing the previous record set in 2004.
Acquiring innovation: how scalable are niche BFY brands?
Across many PIVITAS studies, we’ve seen a tendency for individuals to associate concepts such as BFY, natural, local foods, and authenticity. It’s almost as if individuals are attracted to products that offer these attributes as a complete package. However, it may be a challenge to acquire niche businesses while preserving these attributes at scale.
One issue is that Americans generally display a distrust of “big” businesses. However, they do trust “small” businesses. According to a survey conducted by the Better Business Bureau, just 16% of Americans trust large enterprises compared to 84% of Americans trusting small businesses. Even if a niche or artisanal brand is BFY, it may lose appeal or consumer trust simply by virtue of becoming a “big” business. It’s not unlikely that some corners of the food industry may experience growth across a fragmented landscape of natural and BFY brands that succeed because they embody the trust and authenticity of a “small” business.
Natural and BFY businesses also present a variety of execution challenges for acquirers. A good example of some of these challenges is Campbell’s fresh division. Campbell Fresh includes Garden Fresh Gourmet (acquired in 2015 for approximately $230m), Bolthouse Farms (acquired in 2012 for over $1.5bn), and Campbell’s line of refrigerated soups. As of 2018, Campbell’s has taken nearly $1bn in impairment charges across its fresh division. Campbell struggled to expand Garden Fresh Gourmet’s appeal beyond its regional Midwestern base and found it challenging to integrate a relatively small firm with limited infrastructure. As for Bolthouse Farms, managing a fresh product (carrot juice) proved to be challenging due to unfavorable weather conditions and crop volatility.
How big is the actual opportunity?
Businesses should also be asking themselves what the runway for clean label/BFY actually looks like.
In 2017, organic food products grew 6.4% in retail down from 9% in the preceding year. Granted, growth across overall food sales was 1.1% during that same time frame. However, organic food was still only 5.5% of total food sales in retail as of 2017. Also note that organic grew 17.5% in 2008, meaning that its annual growth rate in 2017 was less than half of what it was in 2008 (see table below).
Declines in organic products’ growth is also interesting considering that as of 2017, the last year in the table referenced above, household savings declined to 10-year lows. Organic products command a 47% premium over alternatives and it might be expected that the category would benefit from an economic climate where consumers are willing to “trade up”. However, it seems that this hasn’t been the case.
Another case that calls into question consumers’ willingness to trade up is Whole Foods. Prior to Amazon’s acquisition in 2017, same store sales were declining 1.5%. One of the first things Amazon did was slash prices. For example, a basket of 15 items cost $97.76 at a Brooklyn Whole Foods location pre-acquisition. Post acquisition the total dropped to $75.85. Traffic rose 3% per quarter post acquisition and through June 2018. While Whole Foods’ prices still remain about 13% higher than traditional grocers, it’s clear that part of Amazon’s strategy is eliminating Whole Foods’ less than flattering nickname: “Whole Paycheck”.
What it all means.
Like many things, the situation may produce more questions at the moment than answers. There is likely a core group of consumers that are dedicated to clean-label products. However, it is unclear how big this group actually is and how much it is likely to grow.
Another important issue is the viability of clean-label as a differentiator. One possibility is that over time, consumers will simply expect their food to be natural or clean label. In other words, clean label might become a base expectation, not a value-add than commands a premium. This dynamic isn’t very different from partially hydrogenated oils (PHO). Labeling a product as being PHO/PHVO free was probably a differentiator at one point, but subsequently became a basic consumer expectation (note that in 2018 the FDA labeled PHO/PHVO as not generally being recognized as safe). Building on this concept is that the clean label/BFY space is becoming increasingly crowded. For example, 34% of snack product launches between 2011 and 2014 had a non-GMO claim.
Moreover, the percentage of consumers that desire organic and non-GMO products is higher than the number of consumers that are willing to pay more for these products (see charts below from a recent MorningConsult study).
For some, the right strategy may be to not go overboard buying businesses that feature clean-label items or launching new items that feature these claims. In the near term, a better option may be to revamp existing products so that they feature clean-label, including non-GMO ingredients. On the one hand, this may allow businesses to take share from competitors that are slow to adapt. On the other hand, if natural, BFY, and/or labels becomes a long-term reality, having these attributes may simply become an essential component of maintaining a viable brand.
Lastly, alternate factors may cloud whether or not clean label/BFY claims are true differentiators. Many consumers gravitate towards brands that tend to convey a sense of purpose (for more on this, see the recent PIVITAS private label article). Clean label/BFY labeling may influence purpose and trust perceptions, but clean label/BFY attributes may not be differentiators in and of themselves. Supporting this point is that (see charts above) knowing or liking a brand tilts the needle for a higher percentage of consumers than various clean label attributes.
In some cases, clean-label and BFY may present attractive growth opportunities. However, acquirers and firms investing in product development should also recognize that the category isn’t silver bullet for achieving growth. Niche products, like BFY, natural, and/or artisanal brands may offer limited scalability and it’s unclear if the majority of consumers are willing to consistently pay a premium for clean label/BFY attributes. This isn’t to say that clean label/BFY trends should be ignored either. In some cases these labels may become basic consumer expectations that present risks for those that are slow to change their ingredient profiles.
On a different note, people may be more label-sensitive when it comes to their pets in comparison to themselves. In 2017 organic products comprised 11.5% of the US pet food market (PIVITAS estimate) while organic was only 5.5% of the US human food retail spend. Now that’s something to chew on.
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.