Volume I, No III October 2008 Feeding the How Food Companies are Th e BGL Food & Beverage Insider Navigating Through the is published by Brown Gibbons Penny-Pinched Consumer: Lang & Company, a leading independent investment bank Becoming more severe than previous recessionary periods, the Tough Economy serving middle market companies current economic downturn, marked by declining wealth, and their owners throughout the rising unemployment, and record-high food prices, has U.S. and internationally. seen consumer confi dence fall to its lowest level in 41 years. According to the USDA Economic Research Service, retail food “I think all companies should plan as if we’re prices are projected to rise by as much as 6% this year, on top Brown Gibbons of last year’s 4% increase—the highest annual increase since going to be in a recessionary environment 1990. Th e infl ationary environment is expected to persist into for the next 12 to 18 months, and that’s Lang & 2009, with a 4% to 5% increase forecasted for the year. Th e fi nancial crisis on Wall Street has served repeated blows to Main how we’re going to approach the business.” Company Street, only exacerbating the anxiety that is building among consumers from all income levels as the more affl uent are also —Indra Nooyi Cleveland feeling the pinch. According to a report released by Packaged 1111 Superior Avenue Facts this June, 55% of households with $50,000 in annual Chairwoman and CEO, PepsiCo Suite 900 income and 45% over $50,000 will change their spending Beverage Digest, October 2008 Cleveland, OH 44114 habits to reduce expenditures. As economic conditions worsen, consumers are tightening their belts, which is impacting food Chicago purchasing behaviors. Two Prudential Plaza Economy ads 180 N. Stetson Avenue Th e silver lining in this looming recession—people still need to Familiar food brands are being promoted with new angles on stretching the food dollar, illustrating the targeted Suite 3600 eat, in good times and bad. However, a lack of disposable income will have an impact on what and where consumers buy. Value eff orts being made by producers to win consumers in the Chicago, IL 60601 strained economy. is the name of the game, and the impact of the recessionary economy is surfacing across all segments in the food chain. Boston Campbell Soup - Promoting “bargain” condensed soups as the Two International Place “original dollar menu” with targeted advertising and special in-store 16th Floor Economizing food promotions and merchandising (e.g., 10 cans for $10). Previous ads for Boston, MA 02110 Branded and private label grocery products are gaining share the soups focused on nutrition. from restaurants, according to Private Label Buyer. Consumers Kraft - Marketing Kool-Aid powdered beverages as a cheaper www.bglco.com are shifting dollars away from restaurants towards food retailers alternative to soda. Television spots advertise Kool-Aid as a bargain, as they prepare more meals at home. showing that four pitchers of Kool-Aid cost the same as one two- liter bottle of soda (“delivering more smiles per gallon”). Kraft has not BRAND “VALUE” advertised Kool-Aid in eleven years. For more information on how As stated, branded food companies are benefi ting from the trend BGL’s Food & Beverage Practice can ConAgra - Promoting budget pricing on Banquet frozen dinners at towards eating at home. However, consumers have been forced $1.50 a meal (“so good for so little”). ConAgra hasn’t advertised its 55- assist your company, please contact: to be more discriminating about their food spending, and year old Banquet frozen dinners in more than a decade. they are looking for value bargains. In response, producers Kellogg - Advertising staple cereal brands like Corn Flakes and Rice are investing more advertising dollars to promote the value Krispies as “aff ordable breakfast choices.” H. Glen Clarke proposition of their brands and increase awareness among cost- [email protected] conscious consumers. 312.658.1600, x4753 Retailers are also getting in the value game. Wal-Mart launched New advertising campaigns, catering to the budget-oriented a new economy-centered advertising campaign telling Leslie A. Nolan consumer, are touting comfort foods and playing up quality consumers that the company is “there for them” through for value in brands. Th is represents a marked shift for economic hardship. Some of the discounter’s recent [email protected] advertising pitches have included: 312.658.1600, x4764 branded food companies, whose most recent focus has been on marketing higher-priced, “premium” products. Producers “Making ends meet. It’s the number one issue on America’s mind this will be balancing the need to provide lower-priced alternatives year. It’s been the number one issue on our minds for over 40 years.” without sacrifi cing taste and quality—all with a sharpened “Shoppers spending $100 per week at a supermarket could save focus on the bottom line as commodity pressures continue on average more than $700 a year* by purchasing the same kind of to impact earnings. “We clearly recognize there’s a value packaged grocery products at Wal-Mart.” proposition there, and we’re going to exploit it,” commented *U.S. cost comparison study based on 2007 sales of packaged foods by category (excludes fresh Campbell Soup Company chief executive offi cer, Douglas meat, produce and other random weight items). Global Insight, Inc., August 15, 2008 Conant, in the company’s fourth quarter 2008 earnings call in September, when speaking to the company’s lower-priced condensed soup off ering. Feeding the Penny-Pinched Consumer Heinz expects to grow despite tough economic times. “Remember, we’re not selling cars or washing machines. We’re selling one-, two-, three-dollar products,” said Heinz chief fi nancial offi cer Art Winkleblack, in an investor conference in Belt Tightening in Slowing Economy October. “A lot of our products are comfort foods, so in these tough times we U.S. consumers have signifi cantly cut back spending in the have the right product for the right time.” It seems that Campbell Soup and worsening economy, reducing away-from-home spending Kraft would agree—consumers need comfort foods to ease them through primarily by changing their dining habits. Restaurants appear to these challenging times. Th e two companies are teaming up in an upcoming have suff ered the most, as consumers have substantially reduced advertisement, pairing Campbell soups with grilled cheese sandwiches made with expenditures for dining out, but are likely be the fi rst to gain Kraft Singles cheese, pitching the meal with the tag line, a “wallet-friendly meal when the economy improves. your family will love.” Key fi ndings from a recent survey* of consumer spending PRIVATE LABEL patterns: Private label stands to substantially gain from the shift in consumer spending, as demand for such products will be heightened in the down economy. Th e rate Changes in consumer spending over past six months: of growth and extent of share gains will depend on how sharply consumers pull back spending and trade down from premium brands to less expensive private- 43 Percent of respondents eating out less label products. Eduardo Castro-Wright, chief executive offi cer of Wal-Mart’s U.S. Division, said in an October interview that the discounter is observing marked 39 Percent of respondents choosing less expensive shifts in consumer buying behaviors, notably Wal-Mart shoppers have more than restaurants doubled purchases of private-label items. According to the Food Institute, overall private label sales have increased over 12% in the fi rst half of 2008, about three 32 Percent of respondents who are buying more private label times the growth that was achieved in 2007. groceries 2007 was a record year in U.S. private label sales. Sales across Changes in consumer spending if economy worsens: major retail channels* increased by $5.4 billion to $74.2 billion, Percent of respondents who would make signifi cant according to industry statistics from The Nielsen Company and 62 additional cuts in their dining habits with a 10% decrease the Private Label Manufacturers Association, with new all-time in disposable income highs achieved in total private label sales as well as in private label dollar share. Compared to fi ve years ago, annual private Changes in consumer spending if economy improves: label sales in supermarkets are up $5.8 billion, an increase of 13.3%, versus national brands, which are ahead 7.1%. 28 Percent of respondents who would bring back dining *Supermarkets, drug chains, and mass merchandiser channels plus Wal-Mart. away from home Retailers are seizing this opportunity and aggressively promoting private label Permanent changes in consumer purchasing patterns: programs to expand share in the slowing economy, using store brands as a point Buying more private label groceries of diff erentiation and loyalty builder in their stores. While consumers may be trading down—as store brands typically off er savings of 15% or more over *September 2008 survey conducted by Booz & Company Inc. The survey polled nearly 1,000 brands—there is a growing perception that private label off ers the same or better households distributed across representative income and age demographics. quality as national brands. Kroger views its innovative private label program as a critical growth opportunity in this economy. Th e company’s three-tier program—Private Selection, Store Wal-Mart is refocusing on store brands. In October, the discounter announced Banner, and Value Brands—is viewed to be one of the most extensive in the plans to create a new executive position to oversee private label, with the intent industry, with more than 14,400 items, and appeals to a broad range of customers to grow sales, market share, cash fl ow, and awareness for its corporate brand on any budget.