Big Food is Being Disrupted

Consumer packaged food giants Kellogg’s, Mondelez, Kraft Heinz, Nestle, and Unilever are facing a long-term trend challenge.  At the low-end, increased competition from store brands erode pricing power and market share. At the high-end, upstart food makers with minimal experience bring new products to market that grab significant profit share.  These trends are not new.  They have been occurring for decades.  In honor of the late Clayton Christensen, we ask: What would he prescribe?

First, is this real?

The disruption from upstart brands taking an initially small niche market and expanding their reach is very real.

• Kellogg’s Nutri-Grain used to own the healthy snack bar category. We thought they would be replaced with Clif Bar and Annie’s Organic, but now it is about KIND, Belvita, and RXBAR. Who knows what will take off next?
• Purina Dog Chow once ruled the doggie bowl. Then P&G thought Iams, Eukanuba, and Nature would. Now, even with Purina One, Purina Pro Plan, and others, brands like Blue Buffalo have come and gone in popularity to be replaced with Merrik, Taste of the Wild, and more recently Freshpet.
• Yoplait and Dannon once owned the yogurt aisle. Now it is Fage, Chobani, Siggi’s, and Wallaby.
• Heinz was synonymous with Ketchup despite efforts by Hunts. Now we have Sir Kensington, Muir Glen and many smaller producers.

Given that these upstarts are disrupting the industry status quo on an increasingly frequent basis, do these new entrants fit the profile of a disruptive innovator as described by Christensen?

Clayton Christensen’s Disruptive Innovator

The Innovator’s Dilemma, by Clayton Christensen, outlined the industry dynamics that are driven by a disruptive technology:

1. Industry incumbents listen to their current customers and continue to deliver sustaining products that meet their evolving needs.
2. A latent niche market exists that has a different set of needs.
3. The disruptor delivers an inferior solution that addresses the needs of that niche market, which industry incumbents had chosen to ignore.
4. The disruptive innovator then ruthlessly moves upmarket, eventually displacing incumbent competitors.

Christensen tracked this dynamic in mechanical excavators, personal digital assistants, discount retailers, motor controls, printers, and most famously, steel mills prior to a prescient prediction regarding electric vehicles.

But does it apply to big food?

Application to New Food Entrants

Importantly for Christensen, the disruptive technology must attack from the low-end of the market, serving an inferior product meeting the needs of the least demanding customer. The new food entrants mentioned in the introduction of this article have all attacked big food companies from the top, not the bottom. Christensen would not have called them disruptive innovations.

But observation and colloquial language would imply differently.  These new food startups are clearly disrupting the market and they are definitely innovative.

• RXBAR delivered a higher-priced, high-protein simple-ingredient snack bar over the cereal filled Nutri-Grain bar.
• Chobani delivered a higher-priced, high-protein, Greek yogurt over the milk yogurt of Yoplait.
• Sir Kensington delivered a higher-priced, more savory ketchup over the sweeter Heinz offering.
• Freshpet delivered a higher-priced, healthier (supposedly) dog food than the Purina offering.

These innovations were not beyond the capabilities of the large food producers at the time. Kellogg’s, General Mills, Heinz, Purina, and others could easily have developed and delivered any of the products created by the upstarts. But they didn’t. Why?

It is not that big food is failing to spend on new product development, for they continuously deliver new products and actively manage new product development. It is that their new products aren’t catching fire like those from start-up food producers.

What is wrong with their New Product Development process?  Why are they failing to deliver the umph desired?

Indications from the Innovator’s Dilemma

Diving into the details of the Innovator’s Dilemma, we find potential hints to their challenge. The origin of the failure of the industry incumbents wasn’t their lack of innovation; it was their inability to deliver the innovation that the market wanted. For big food, that could come from either of two major sources of bad information:

1. What their channel customer wants, or
2. What their current customers want but don’t know how to express.

Perhaps big food is paying too much attention to their current customers and insufficient attention to the emerging needs of their non-customers. Or perhaps big food is paying attention to their distribution customers in the form of grocers and not sufficient attention to their end customers: consumers. Either way, they missed the mark and are paying dearly for it.

The result has been a string of acquisitions. For instance, consider a small fraction of the numerous transactions in recent years:

• Snyder’s acquired Diamond Foods in 2016.
• M. Smucker acquired Sahale Snacks in 2014.
• Hershey acquired Pirate’s Booty in 2018.
• Campbell’s Soup acquired Garden Fresh Gourmet. General Mills acquired Annie’s Inc.
• Proctor & Gamble acquired Iams in 1999 for $2 billion (and $250 million in debt) and then sold it and other pet care businesses to Mars for $2.9 billion.

Mind you, many of these acquisitions did not work out as planned. The imagined sales growth did not materialize and the cost savings proved elusive. The shortcomings of the acquisitions and their failure to meet their stated objectives have thwarted many careers and soured many investor’s demand for their stocks.

If acquiring upstarts isn’t the solution, what is? 

It would be foolish to advise a blanket prescription to big food producers to innovate faster and broader, but the acquisition approach has proven challenging. By challenging, I do not mean it is the wrong thing to do nor that it is the right thing to do, but that it clearly presents a challenge.

The upstarts succeeded by taking a niche market and demonstrating profitability. The incumbents seek economies of scale. Perhaps, for the incumbents, it is time to stop thinking of the U.S. as a monolithic market. Segmentation and mini-brands might be the track to go back to the future. There is something to be said for economies of scope, meaning lots of small brands each of which is profitable in their own right.