(Bloomberg Businessweek) —
A few weeks ago, PepsiCo Inc.—the biggest maker of grocery store food in the US—reported its quarterly earnings. To put it bluntly: They were not good. After several years of price hikes, consumers are buying less of PepsiCo’s food and beverages, which include Lay’s potato chips, Doritos and Mountain Dew. The drop was especially acute in the North America, with volumes down in both drinks and salty snacks. Sure, dollar sales were up slightly, but in these inflation-ridden times it’s sales volume that says more about the health of a business.
Chief Executive Officer Ramon Laguarta blamed struggling American shoppers, whom he’ll try to woo back with discounts and ads. “There is clearly a consumer that is more challenged, and it’s a consumer that is telling us that in particular parts of our portfolio, they want more value,” he said on the July 11 call. But maybe value these days isn’t just about cost—it’s about quality, too. Large swaths of the packaged food industry are seeing the same thing: People are buying less junk.
If you look closely, it’s not the entire supermarket that’s suffering. The fresh fruits and vegetables sections in the perimeter of the store are seeing sales volumes go up, according to market researcher Circana. These foods are often more expensive, so it’s not a straightforward dollars-and-cents issue. While some of the trend is a result of people cooking at home more instead of eating out, it’s also a signal that people want to eat healthier, and they know fresh food is a key part of that. They may have taken a little break during Covid, stuck at home grazing on Goldfish crackers and Chef Boyardee pastas. But they also learned to cook more, and, for some people, to value their own health. (Those on Ozempic and its ilk aren’t driving the trend, but since some develop “an aversion to high-fat, high-sugar foods,” says Fatima Cody Stanford, an obesity medicine physician scientist at Harvard Medical School, it may be another small contributor.)
None of this should be a shock to packaged food companies. Goldman Sachs’ Jason English predicted it just over a year ago, writing in a report that he expected a “slowdown in per-capita consumption” of processed, shelf-stable foods. He later told me in an email that, in a continuation of a long, pre-pandemic trend, he expected consumers to eat more fresh foods—and that retailers were paying attention, building up these parts of their stores, while “shrinking” the centers, where all those bags of Goldfish and cans of Beefaroni are stocked.
Indeed, a recent report from FMI, the Food Industry Association, noted that 44% of grocers are increasing space for fresh produce—and 19% said they’re decreasing space for the center aisles. The change in store format is a long-term investment, in real estate, energy costs and skilled labor. “This is not a one-year trend,” says Mark Baum, senior vice president of industry relations at FMI. In a report in June, market researcher Mintel also said there is a “notable increase in consumer preferences for healthier, fresher, and nutritious” foods, and encouraged retailers to “capitalize” on the shift with a wider product assortment.
We’re not just talking about the Whole Foods customer. Look at Food Lion, a low-priced supermarket chain with stores mostly in the Southeast and mid-Atlantic. It’s been installing walk-in produce coolers at a number of its stores: It added 35 in 2015, more in 2018, and it’s still going. Even Dollar General has jumped on the trend, announcing in January that the number of its stores that stocked fruits and vegetables had surpassed 5,000.
So should a packaged food behemoth like PepsiCo try to slide into the produce section? For its part, the food manufacturers’ industry group, the Consumer Brands Association, says its members are doing just fine, falling volumes or not. Members are “providing choice, innovating to meet consumer demand,” says Sarah Gallo, its vice president for product policy.
The business of fresh food—meant to be eaten in the next week or two—is a dramatically different proposition than processed food, which is loaded with artificial preservatives, ideal for stocking a basement. With perishability at the forefront, suppliers, manufacturers and distribution logistics need to change. Plus, once in the store, big processed food companies don’t have that same guaranteed shelf space in the fresh sections. “We have not seen any of the branded packaged food players make big plays in those areas for some of those reasons,” says Jeff Cleveland, food industry adviser at investment bank Lincoln International, of recent merger and acquisition activity.
There was one attempt more than a decade ago, but it ended badly. In 2012, Campbell Soup Co. acquired Bolthouse Farms, a fresh food company known for its baby carrots and refrigerated juices, for $1.55 billion. The move would give the stodgy canned soup maker a foothold in the “rapidly growing, $12 billion market for packaged fresh foods,” it said at the time. Seven years and millions in losses later, Campbell’s sold the company for a fraction of what it originally paid. Food Dive, a trade publication, wrote about the failed marriage, noting that the conglomerate “quickly saw the pitfalls of a brand dependent on fresh produce and tied to the unpredictability of Mother Nature.” Those included managing crops and organizing a spoilage-driven product recall. In short, what initially looked like a pioneering move from Campbell’s instead went down as a cautionary tale.
But packaged food companies could take a slower, more cautious approach. Last summer, in a partnership with Fresh Del Monte Produce Inc., Kraft Heinz Co.—which also just reported a drop in volumes—started offering some versions of its Lunchables cold cuts and cheese trays with fresh pineapple, clementines, apples and grapes. It doesn’t sound radical, but it is: The shelf life of the new combo pack is now 10 days, compared with 90 to 110 for standard Lunchables—and the suggested pricing is about $1 to $2 more. But the experiment seems to be working. What started in a small number of grocers, the company hopes to roll out nationally by fall, a spokesperson said.
For all its trouble trying to reinvigorate its business, PepsiCo, as it turns out, may have the answer right under its nose. Ahead of earnings, the company sent me a sampling of some of its international offerings, including a chilled carton of Alvalle, its Spanish gazpacho. Every single ingredient in it is “real food”—tomatoes, red peppers, cucumber, onion, extra virgin olive oil, wine vinegar, salt, garlic and lemon juice. It’s low in calories, high in fiber, fresh and not highly processed. Most important, it tastes really, really good; if it were served in a restaurant, I wouldn’t know it came from a carton. No wonder an executive for PepsiCo in southwestern Europe called it “the jewel in our crown” a few years ago. But while it’s available in some European countries, it’s not in the US. “So far it’s primarily in markets where gazpacho is more familiar/part of the culinary tradition,” a spokesperson told me in an email.
Certainly, though, the company that managed to turn Doritos into a dinner ingredient could find a way to make gazpacho—and other fresh foods—part of the culinary tradition here at home. Especially if its future growth depends on it.
(Updates with new Mintel report in fifth paragraph. A previous version of the story corrected the name of the fruit company Kraft Heinz Co. partnered with in 10th paragraph.)
To contact the author of this story:
Deena Shanker in New York at dshanker@bloomberg.net
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