Millennial Munching: a Big Brand Playbook As the Small Rise Up
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June 11, 2017 Millennial Munching A big brand playbook as the small rise up & generations transition Equity Research The Conde Nast-GS Love List: Consumer insights across the food industry The small rise up and the big fall down The growth vs. scale dilemma and call for Legacy packaged food companies are experiencing broader portfolio approach Jason English sales headwinds on both weaker category growth (212) 902-3293 [email protected] Our combined analysis suggests very few brands Goldman Sachs & Co. LLC and share losses. While private label is in focus of that attempt to achieve scale and growth will late, evidence suggests that small brands are the succeed, which may run counter to the CPG main drivers of share losses as barriers to structure and culture of big brand concentration. We Mitch Collett, CFA distribution and brand building fall at the same time look for companies with established Millennial +44(20)7774-1060 [email protected] big brands curtail investment. Goldman Sachs International preference, a track record of brand investment and a Opportunity on the horizon for those flexible portfolio approach embracing a small brand mindset to separate the likely leaders from laggards. Dylann B. Katz ready to seize it (212) 902-7929 [email protected] Category growth should improve in the years ahead MDLZ & Nestle lead; CPB & KHC lag Goldman Sachs & Co. LLC as Millennials form households and ramp food at Leaders: MDLZ benefits from both broader snack home consumption. To better understand which affinity and strength in Oreo, overlaid with consistent Vivek Srivastava brands and companies are best positioned to investment and a big and small brand (e.g., Vea) (212) 934-8372 [email protected] capture that growth, we executed an attitude and mindset. Nestle stands out with top brands in coffee Goldman Sachs India SPL usage study across 35 attributes for 172 brands in (#1 coffee brand), water (San Pellegrino #1 overall conjunction with Conde Nast. Some of the findings Millennial favorite) and leading brands in frozen. are surprising. Many big brands are far from Laggards: Numerous CPB brands appear relatively irrelevant – Millennials demonstrate above average disadvantaged and continuous advertising cuts affinity for them. Big brand communication and disconcerting. At KHC, low brand support raises company portfolio strategies, however, appear questions and a culture of cost efficiency appears largely unaligned with the attributes that can fuel counter to the portfolio complexity likely needed to growth vs. scale. thrive. Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S. The Goldman Sachs Group, Inc. Global Investment Research June 11, 2017 Americas: Food: Packaged & Manufacturing The problem: Rise of the small but mighty Further Reading Organic sales growth for leading packaged food companies has disappointed in recent years with the aggregate of our US packaged food coverage setting a new all-time low organic sales decline in 1Q17 (-1.6%). The source of weakness has been twofold. First, This report is part of our overall category growth has slowed which has been most pronounced for center-store categories as consumer shopping behavior ongoing series on the migrates to the perimeter of the store. Equally problematic has been broad based market share erosion. The old adage of number business implications of one or number two brands are most defensible in categories has broadly broken down as top brands are broadly (though not a maturing Millennial generation. For more, universally) losing share. see: In some instances, the share loss for leading brands has been to private label which has garnered increasing investor focus of late The fashion Love List given announced or suggested initiatives by retailers (e.g., Amazon’s private label assortment expansion, Walmart’s focus on A report on global private label and the US expansion of private label oriented Lidl and Aldi). While we are not dismissive of private label threats, we snacking & the see greater cause for concern in the rise of the small brands. munching mismatch Smaller brands, many of which are being led by entrepreneurs (e.g., Kind, Clif or Quest in bars, Amy’s Kitchen in frozen, Siggi’s in Our Consumer Currents yogurt), continue to make inroads and are outpacing both industry and private label growth across the food industry. The pattern is webpage even more evident when we focus on the top 50 packaged food categories which drive 80% of industry sales. Among the top 50 categories, we see established brands and private label losing share in general to smaller brands on both a three and one year basis; in 2016, small brands gained share in 62% of the top 50 categories vs. only 40% for private label and 32% for the leading brand. We believe the rise of the small brands and fall of the big brands is driven by multiple factors: Barriers to distribution are falling. Traditional retailers continue to broaden their assortment and are increasingly welcoming of small and differentiated brands as they attempt to differentiate their offerings from peers and cater to expanding consumer preferences. In Nielsen measured channels, the average number of SKUs per store has expanded at a 2.5% CAGR since 2013 with major food companies seeing a 0.7% increase, private label rising 2.7% and all-other branded manufacturers leading the growth at 3.8%. On-line, while still in its infancy in Food, will likely perpetuate this given broader assortment in the channel and easier access/lower cost for smaller companies. Barriers to building brand awareness and interest have fallen. Enhanced social connectivity through digital platforms has facilitated both rapid spread of word-of-mouth awareness building and peer endorsement for brands. Both small and large brands alike can benefit from this, but the point is that it has leveled the playing field. Compounding this has been the digitization of media; multi-million dollar mass media campaigns are no longer requisite to build awareness – another leveling effect. Intense focus on margins has likely increased the vulnerability of big brands. The industry at large has prioritized margin expansion in recent years, often at the expense of brand investment. Traditional advertising spend by large brands has materially declined in recent years. This followed an over decade long process of engineering cost out of the food by major companies. The combination has resulted in food products that are often seen as over-engineered by consumers and now less supported by brand investment. An evolving consumer psyche may also play a role. Some see a connection between broader anti-establishment movements among the Millennial generation and a distrust of big brands. While we intuitively understand the argument, Goldman Sachs Global Investment Research 2 June 11, 2017 Americas: Food: Packaged & Manufacturing we note that anti-establishment movements have been commonplace in history and believe the other three explanations are the main drivers for big brand weakness. Exhibit 1: Sales have eroded for major food companies as both industry Exhibit 2: Share losses have come as proliferation of assortment at food growth has slowed and market share was ceded to private label and smaller retailers persists with smaller branded companies the primary gainers companies YoY Average items per store, 52 wk periods ending March YoY $ sales growth, 52 wk periods ending March 5.0% 6.0% 4.0% 5.0% 3.8% 3.0% 4.0% 2.3% 2.7% 1.9% 3.0% 2.5% 2.0% 1.4% 2.0% 1.0% 1.0% 0.7% 0.0% 0.0% ‐1.0% ‐0.8% ‐1.0% ‐2.0% ‐2.0% ‐3.0% ‐3.0% 2014 2015 2016 2017 13‐17 CAGR 2014 2015 2016 2017 13‐17 CAGR Food majors Private Label All Other Total Food Food majors Private label All Other Total Food Source: The Nielsen Company, Goldman Sachs Global Investment Research. Source: The Nielsen Company, Goldman Sachs Global Investment Research. Note: Food majors include CAG, CPB, GIS, HSY, SJM, K, KHC, MDLZ, Mars, Nestle, PF Note: Food majors include CAG, CPB, GIS, HSY, SJM, K, KHC, MDLZ, Mars, Nestle, PF Exhibit 3: Among the top 50 packaged food categories over the past three Exhibit 4: While not ubiquitous, small brands have gained share in 53% of the years, big brands have lost share at the expense of “all other’ smaller brands, categories analyzed vs. only 40% for the incumbent leader not private label 2013-2016 % gaining market share 2013-2016 market share change 0.8% 60% 53% 0.6% 49% 0.6% 50% 43% 0.4% 40% 40% 0.2% 30% 0.0% ‐0.1% 20% ‐0.2% 10% ‐0.4% ‐0.3% ‐0.6% ‐0.5% 0% #1 brand Top 3 brands Private label All other #1 brand Top 3 brands Private label All other Source: The Nielsen Company, Goldman Sachs Global Investment Research Source: The Nielsen Company, Goldman Sachs Global Investment Research Goldman Sachs Global Investment Research 3 4 Yogurt Veg. & herbs Ref. meals other Infant formula 62% Shortening & oil Soft drinks e most erosion and erosion most e Candy label All SS juices & drinks 40% w spanning 62% of major food of major 62% w spanning Spice seasoning Baked bread Coffee SS fruit brands Private 3 SS liquid soup Water Cheese RTE cereal brand Top 34% 34% Fresh meat #1 Breakfast meat Cream …with small brand share gains no gains share brand …with small 0% 70% 60% 50% 40% 30% 20% 10% Wholesome snacks Shelf stable veg.