Disruption in the food industry
Even as companies like Kraft (Altria), Nestle, General Mills, and Unilever have managed to great a dominant oligopoly in the food industry and have perfected the creation, manufacture and marketing of processed foods, they are facing three big problems.
- The oligopsony of major supermarket chains like Wal-Mart and Safeway that put serious pressure on wholesale prices.
- The rise of store-label products from those supermarkets and others that compete directly against carefully promoted brands names.
- A small-scale but growing rebellion from users. A significant number of consumers are starting to change their eating habits, and moving away from the over-processed, over-salted, over-sugared products from Big Food.
That third issue is still in its early stages, but it is growing steadily and giving Big Food an upset stomach, according to a recent Wall Street Journal article ("As Shoppers Grow Finicky, Big Food Has Big Problems", 5/31/2004). That article documents the difficulties Kraft ahs had adjusting to this new reality.
The article states, "For Kraft, the nation's largest food company, keeping up with consumers' rapidly changing tastes has been especially tough." One example is the 200 acquisition of Nabisco, leading in an industry that has been hit hard by evolving consumer health issues. The catalog of Kraft's biggest sellers (Jell-O, Miracle Whip, Lunchables, Macaroni & Cheese) are all no-no for a wide variety of dieters form Atkins and South Beach to WeightWatchers. Thus all of these areas have slowed growth, while the organic food sector has been growing at 10 to 15% per year, while gourmet brands and specialty condiments are growing at similar rates. Kraft's hitherto masterful strategy of extending brands is not working.
One area of Kraft expertise that is getting away from the company is cheese. Kraft's processed cheeses (from Philadelphia Cream Cheese to Velveeta) used to be almost the only cheeses you could find at supermarkets. Now grocers in the Midwest offer scores of varieties of European and domestic cheeses from genuine Italian Parmagiano to Vermont artisinal goat cheeses. That's a real change in direction from supermarket shelves that are more and more dominated by a few vendors in each category. As the article points out, "Last year, U.S. sales of natural Asiago cheese, primarily distributed by a handful of importers and private-label brands jumped 43% …. Sales of Kraft aerosol cheese, which include Cheese Whiz, fell 9.6%. Kraft's natural cheese sales grew 5.4%, while sales of its processed cheese fell 2%."
Kraft is desperately fighting back, with the acquisition of "natural" brands a (Back to Nature and Athenos) and increased market campaigns (cheese has fortunately turned out to be "low card"). The question is whether this is a matter of buying out existing products and marketing them like crazy in an industry where Kraft's biggest assets have been in efficiencies of scale. Kraft recently replaced its CEO to address this very problem.
The same problem faces all big food producers. Most are hurrying to organic labels and many, from beer to ice cream, have made a big noise about new low-carb products. The question is whether being too big is a liability in a rapidly fragmenting food market.
