– Special Report: The war on big food (Fortune, May 21, 2015):
Major packaged-food companies lost $4 billion in market share alone last year, as shoppers swerved to fresh and organic alternatives. Can the supermarket giants win you back?
Try this simple test. Say the following out loud: Artificial colors and flavors. Pesticides. Preservatives. High-fructose corn syrup. Growth hormones. Antibiotics. Gluten. Genetically modified organisms.
If any one of these terms raised a hair on the back of your neck, left a sour taste in your mouth, or made your lips purse with disdain, you are part of Big Food’s multibillion-dollar problem. In fact, you may even belong to a growing consumer class that has some of the world’s biggest and best-known companies scrambling to change their businesses.
Lest you think this is hyperbole, consider the commentary in February at the Consumer Analyst Group of New York conference, the packaged-goods industry’s premier annual gathering.
“We look at our business and say, ‘How can we remake ourselves?’ ” said Richard Smucker, CEO of his family’s namesake jelly giant SJM -0.32% . A second exec—this one at ConAgra CAG 0.21% , which owns 29 food brands that bring in $100 million in annual retail sales apiece—bemoaned to Credit Suisse analyst Robert Moskow that “big” had become “bad.” A third conveyed what her industry feared would be the largest casualty of the public’s “mounting distrust of Big Food”—that shoppers would turn away from them for good. “We understand that increasing numbers of consumers are seeking authentic, genuine food experiences,” said Campbell Soup Co. CPB -0.48% CEO Denise Morrison, “and we know that they are skeptical of the ability of large, long-established food companies to deliver them.”
And here’s one number to capture that skepticism: An analysis by Moskow found that the top 25 U.S. food and beverage companies have lost an equivalent of $18 billion in market share since 2009. “I would think of them like melting icebergs,” he says. “Every year they become a little less relevant.”
“Their existence is being challenged,” says Edward Jones analyst Jack Russo of the major packaged-food companies. In some ways it’s a strange turn of events. The idea of “processing”—from ancient techniques of salting and curing to the modern arsenal of artificial preservatives—arose to make sure the food we ate didn’t make us sick. Today many fear that it’s the processed food itself that’s making us unhealthy. Indeed, nearly half of the respondents in a recent Bernstein survey say they distrust the food system. Shoppers still value the convenience that food processing offers, says Moskow, “but the pendulum has definitely shifted in their minds. They have more and more questions about why this bread lasts 25 days without going stale.”
It’s pretty simple what people want now: simplicity. Which translates, most of the time, to less: less of the ingredients they can’t actually picture in their head.
While consumers have long associated the stuff on the labels they can’t pronounce with Big Food’s products—the endless strip of cans and boxes that primarily populate the center aisles of the grocery store—they now have somewhere else to turn (more on that in a bit). And that has brought the entire colossal, $1-trillion-a-year food retail business to a tipping point. Steve Hughes, a former ConAgra executive who co-founded and now runs natural food company Boulder Brands, believes so much change is afoot that we won’t recognize the typical grocery store in five years. “I’ve been doing this for 37 years,” he says, “and this is the most dynamic, disruptive, and transformational time that I’ve seen in my career.”
Shoppers are still shopping, but they’re often turning to brands they believe can give them less of the ingredients they don’t want—and for the first time, they can find them in their local Safeway, Wegmans, or Wal-Mart. Rather than carry traditional products with stagnant sales, chains like Target are actively giving increasing space on their shelves to a slew of New Age players like yogurt-maker Chobani, Hampton Creek (which sells a popular plant-based mayo), Nature’s Path, Amy’s Kitchen, and Lifeway Foods, which makes a yogurt-like drink called kefir. Retailers are creating their own brands too. Kroger’s KR 0.47% Simple Truth line of natural food grew to an astonishing $1.2 billion in annual sales in just two years. And compounding the frenzy is that many brands are discovering they don’t need shelf space to begin with. Natural and organic food company Hain Celestial, with more than $2 billion in revenue, says Amazon AMZN 0.04% is among its top 10 vendors in the U.S.
The search for authenticity has led organic food sales to more than triple over the past decade and increase 11% last year alone to $35.9 billion, according to the Organic Trade Association. Data provider Spins found that sales of natural products across nearly every category are growing in mainstream retailers, while more than half of their conventional counterparts are in decline.
Perhaps more frightening for Big Food, shoppers are doing something else as well: They’re skipping the middle aisles altogether. For each of the past two years, according to Bernstein research, the annual volume of packaged food sold in the U.S. has fallen more than 1%. While that dip may seem small, it’s a portent of a much larger, even seismic, shift in the stuffing-our-gullets business. Yes, as in every other legacy industry, Disruption (with a capital “D”) is here. Big Food is under attack from Startup Granola.
Traditional packaged-food companies, however, aren’t taking the assault lightly. Some are attempting to buy their way into the natural space, acquiring small health food companies by the fistful. Almost all are radically rethinking their own product recipes. Kraft Foods, for instance, is removing synthetic colors and artificial preservatives from its flagship mac and cheese. Tyson has announced it is eliminating the use of human antibiotics in its chickens raised for meat. General Mills GIS -0.12% , which has already removed genetically modified organisms (GMOs) from its original Cheerios, has cut sugar by 25% in its Yoplait yogurt. All of these developments have happened in the past half year.
Fortune spent months getting inside several of the industry’s key corporations to understand how they’re responding to the mounting threat. One thing is clear: Big Food is suddenly looking like an underdog.
American shoppers have become skeptical of “the barn on the package.” That’s the catchall phrase that Stonyfield Farm co-founder and chairman Gary Hirshberg uses for how big food companies dress up their products as “natural”—a mystical term in the food industry that has no real meaning. The U.S. Food and Drug Administration does not even define it. But as consumers, especially millennials, have taken a more active and informed approach to what they buy, the barn has lost its appeal. Says Hirshberg: “There’s enormous doubt and skepticism about whether large companies can deliver naturality and authenticity.”
Some are betting that authenticity can be purchased. Industry goliaths are busy filling up their shopping carts, hunting for natural food brands to buy. “The prices have gone through the roof because everyone wants in,” says Edward Jones analyst Russo. Arran Stephens, co-founder and president of organic food company Nature’s Path, says he receives some 50 overtures a year from interested buyers. “I’m talking about all the major names,” he says. “I don’t think there are any that haven’t contacted us.” (He refuses to sell.)
“What these companies are trying to do is expedite their evolution,” explains Hirshberg, whose yogurt operation is today owned by Danone.
Campbell CEO Morrison has clearly been in expedite mode. One of the more candid executives when it comes to addressing Big Food’s woes, Morrison tells Fortune that she knew she had to “shift the center of gravity at Campbell” when she took over the company in 2011. The trends for soup, Campbell’s core business, were not looking good. Over the past decade, industry tracker NPD Group has recorded an 18% decline in canned-soup consumption at dinner and a 7% decline at lunch. Not only were the category’s volumes declining, but so too was Campbell’s portion of the bowl—with its namesake brand’s U.S. share dropping from 49% in 2005 to 42% in 2014, according to Euromonitor International.