How big food and beverage companies can reconnect with the consumer

Baby boomers in western markets such as the USA are the core consumers of iconic brands of big food and beverage companies, in for example soft drinks, snacks and foodservice. This consumer generation runs into retirement. It urges the leading food and drink companies to better respond to the demands of new generations. ‘All is not lost’, says Rabobank analyst Nick Fereday.

The analyst at Rabobank Food & Agribusiness Research and Advisory (FAR) presented his report ‘Dude, where’s my consumer?’ during the ‘Feeding the City’ seminar on 29 May 2015 in Toronto.  This conference took place during the Dutch economic trade mission to Canada, in which Rabobank participated. Rabobank is an international food and agri bank, with customers in the whole food chain.

What is the position of the iconic food and beverage brands in the US?

Fereday: ‘Some iconic brands remain irreverently relevant and laugh in the face of today’s health and wellness trends. But many of America’s largest food and beverage companies experience that their iconic brands, which are the traditional elements of the national diet, are increasingly out of favor with consumers. This trend is being seen across packaged food, foodservice, soft drinks and alcoholic beverages.’

What is happening?

‘One of the most important changes is the rise in purchasing power of the 75 million-strong millennial generation: 18- to 34-year-olds. They have surpassed the baby boomers, 51- to 69-year-olds, as the largest generation.

Once, baby boomers were core consumer for iconic brands which we all know. The new generation is more experimental in their food and beverage choices, more health-conscious, seeking fewer processed foods, and they also appear to be willing to spend a greater share of their income on food. Social media is the principal source driving the acceleration in trends and the growing number of alternative distribution options has created new opportunities for emerging brands.’

What does this mean for food and beverage companies?

‘The speed at which these companies can evolve to align with changing tastes is a critical issue. For companies heavily invested in manufacturing their core brands for the mass market, this is tough. Smaller companies have proven to be adept at spotting and responding to new trends and gaps in the market and the consumer attitude towards these smaller companies has also changed positively. Brands of smaller companies often have a more premium image and are often priced in excess of 50 percent of the category average price. In contrast, many traditional brands seem to be heading in the opposite direction.

Unless bold action is taken, the leading food and beverage companies run the risk of following baby boomers into retirement.

All is not lost. Consumer tastes are shifting, but not so fast that companies cannot capitalize on them. Many of today’s consumer trends will remain relevant for years to come.’

‘Unless bold action is taken, the leading food and beverage companies run the risk of following baby boomers into retirement.’

Nick Fereday, analyst at Rabobank Food & Agribusiness Research and Advisory (FAR)

Innovation is key for large food and beverage companies. They have the choice between acquisition of companies (‘buy, not build’) and in-house innovation (‘build, not buy’).

What’s the best innovation strategy: build or buy?

‘We don’t believe one strategy is preferable over the other. It depends on the need companies are trying to fill, how much time they think they have, their appetite for risk, and the strengths and weaknesses of the company itself.’

In case of ‘buy, not build’: what is your advice?

‘Our advice is to continue to outsource innovation by buying companies, but at an earlier-than-normal stage in the life cycle. Thereby companies can reduce the risk of paying too much.

In short, it’s better to run the risk of overpaying for a number of small scalable companies than betting the house on one major acquisition. Waiting too long might just make it too expensive. We believe food and beverage companies will increasingly have to start dipping more than just their toes into the world of venture capital, incubators, accelerators and online platforms to source their next big idea.’

What’s your advice for large companies that build innovations themselves?

‘In some ways, this strategy is potentially more disruptive to the company, as it requires a re-ordering of strategic priorities and a longer-term perspective. But what most food companies pass off as an innovation is rarely that; it is conservative innovation at best, such as line extensions, repackaging or reformulating the recipes of iconic brands. Companies need to focus on bolder and more disruptive innovations, addressing the new and unmet needs of consumers.’