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Disruptive Food Brands Get a Taste of Their Own Medicine — Heard on the Street

Healthy by Healthy
May 11, 2020
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Disruptive Food Brands Get a Taste of Their Own Medicine — Heard on the Street
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By Carol Ryan 

Seeking comfort while sheltering at home, shoppers are reaching for Hershey Bars rather than gluten-free energy balls. That is bad news for challenger brands, whose healthy snacks were taking market share from global food companies until very recently.

Discussing their latest quarterly results, executives at Nestlé, Kraft Heinz and Procter & Gamble all said consumers are returning to old-fashioned brands that had previously fallen out of favor. The Hershey Company noted that its confectionery products gained 3 percentage points of market share over the past month or so. As consumers hoard nonperishable food, goods such as processed cheese and canned soup that had been losing out to healthier alternatives are recording their strongest sales in years.

It isn’t yet clear if the trend will stick, but the shift is significant. Challenger brands have been taking market share from global food manufacturers for several years. In January and February this year, insurgent brands — defined as those that are growing more than 10 times faster than their category — captured 35% of the year-over-year growth in the consumer industry, according to consulting firm Bain & Company. In March and April, their share of growth shrank to 5%.

Lack of scale is now a disadvantage. Supermarkets have reduced the range of products they offer to ensure everyday essentials are available. That plays to the strengths of global manufacturers like Nestlé and P&G who can deliver orders in bulk. In the short term at least, small brands are being elbowed off the shelves.

The asset-light business model favored by insurgent brands also has downsides. As they use third-party manufacturers rather than owning factories, these companies struggle to increase capacity when there is a big spike in demand. They are also competing with deep-pocketed rivals for constrained logistics services. Third-party transport costs have increased by 20% in certain markets.

Even if the distribution squeeze is temporary, startups may not have the cash to survive for long. Funding for these kinds of businesses is drying up. Worldwide, the number of venture capital investments in consumer brands fell 26% in the first quarter of 2020 compared with the same period of last year, PitchBook data shows. Even before the crisis, investors had moved on to other hot sectors such as health care and software. Last year, venture capitalists handed over 54% less cash to consumer brands than in 2018, according to data tracked by Goldman Sachs.

Of course, entrepreneurs are nothing if not nimble and can focus on selling their goods online. The problem for food brands in particular is that over 90% of sales still happen in bricks-and-mortar stores in most markets. Challengers with a well-established online sales channel may fare better in the current reversal.

Meanwhile, big food brands have an unlikely opportunity to regain some of the ground they lost in recent years. They might even buy up struggling rivals on the cheap.

Write to Carol Ryan at carol.ryan@wsj.com

 

(END) Dow Jones Newswires

May 11, 2020 06:36 ET (10:36 GMT)

Copyright (c) 2020 Dow Jones & Company, Inc.

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