The Food Industry's Big Freeze

Last week at a conference in New York, I presented fallout from the business world’s most cautionary tale: The Food Industry.

1. Dangerous acts of omission
2. Disregarded warnings and signals
3. Unpleasant fate for organizations and their leaders

The frenzied way food companies are working to recover from a chronic failure to see and pull the future into their organizations is having a mocking effect on growth and earnings.

A 30,000-foot view of just a few conditions that forecast more challenging consequences:

Supermarkets

• Store brand sales are outpacing national brands—the mix negatively impacts financials.
• Consumers of all incomes and demographics are migrating to limited assortment deep discounters.
• Last mile fulfillment is eroding profits with additional transport and handling costs.
• E-commerce is cannibalizing in-store traffic, and high profit impulse sales are in decline.
• Supermarkets are feeling harsh effects from the swell of off-premise consumption. Food availability intercepts consumers wherever they can be found--reducing supermarket visits.

Foodservice

• Fast food unit saturation from easy credit and franchising.
• Rents, debt levels, labor costs and unsuccessful investments to draw patrons are producing a wave of bankruptcies and closures.
• Traffic at most majors is down; square footage is unoccupied at full service locations.
• Surge in takeout and delivery is killing profit: Double-digit commissions to third party delivery services, loss of high profit alcohol and dessert sales.
• Reasons for declines include falling football viewership (pizza, burgers), reduced housing and infrastructure construction (lost lunch dollars), Netflix (eat at home; home theaters), healthcare costs, half of all consumers  (including millennials and Gen-X) still struggling to buy groceries, low immigration (a key fast food demographic). (partial sources: IRI, Wendy’s CEO)

Manufacturers (Pentallect’s summary of Top 20 F&B filings)

• Average 5.5% revenue growth YTD versus 2017. Of this, 9% is attributable to volume growth, 27% to price/mix, 64% to acquisitions.
• Gross and operating profit 1.0% and -0.5% respectfully.
• Only one in four top manufacturers reported positive results in four key metrics: Sales, Gross Profit, Operating Expense and Operating Profit.

Blueberry’s View

• Until now, value streams had an all-encompassing flow directed to a constant consumer base that did not require much variation. This model is gone forever, but implications continue to escape CEO and board scrutiny.   
• Ineffectively-examined food companies are still working from value propositions and business models that are out of date and out of sync with consumers and channel partners.
• Innovation is distinct from R&D with narrow overlap. R&D is easy to duplicate; innovation is not. Propensity for SKU proliferation is wreaking havoc on a system collapsing on itself with no shared value in the chain.  
• Ask, and companies struggle to explain exactly how they create value in the new industry paradigm.
• The cycle of every new novelty fast-tracking to permanent consumer adoption will speed up and multiply. 

The food industry will never return to where it once was.

But despite all the activity, corporate results unfortunately remain largely frozen, paralyzed.

CEOs and boards do well to get a very clear and accurate picture of what’s changed and why, what’s coming and how to invest to protect and grow their organizations.