This is the first article in a four-part weekly series that looks at how food and beverages companies fared during the pandemic. The second part, also published today, features charts comparing several publicly traded food companies’ pandemic-period sales to those a year prior.
Next week, Food Dive looks at the companies that did not follow the same growth pattern as most.
While 2020 was a bad year for most businesses, many people and health in general, the food business was booming.
As a whole, CPG food and beverage saw unprecedented growth, with industry sales up 12% in 2020, according to Stacey Haas, a partner at McKinsey & Company. A Food Dive analysis of earnings reports from publicly traded food companies in the U.S. showed sales growth in a single quarter up as much as 38% over the same quarter in 2019.
While food is traditionally seen as a safe investment, publicly traded companies have found sales and margin growth challenging in recent years. Many companies had been through years of slow growth — if any at all — due to changing consumer preferences, as well as trendy upstarts and private label stealing market share from larger brands.
But then the COVID-19 pandemic shut down offices, restaurant dining rooms, movie theaters, cafes and schools. Consumers found themselves stuck at home, rediscovering their kitchens. Grocery store shelves were emptied as many people weren’t sure how long they would be at home — or how serious the pandemic would be.
Randy Burt, a managing director at AlixPartners, said the shutdown of the food-away-from-home channel made an enormous difference in CPG sales. For the past 30 years, more consumer dollars were spent on food outside of the home and less have gone toward CPG brands in grocery stores. With the quick shuttering of many businesses and venues, Burt said massive sales growth was diverted to food and beverage brands.
Department of Agriculture statistics cited in a report from Rabobank Food & Consumer Trends Executive Director Nicholas Fereday back that up. More than half of all dollars spent on food in 2020 — 55% — was spent on food at home, a 7-point increase from 2019.
With the rapid change in consumer behavior, food and beverage companies not only found themselves at the beginning of a potential boom, but also needing to make major and quick changes to adapt to a new industry landscape.
“The first 10 weeks of the pandemic, we saw 10 years of development, … whether it was the whole shift from bricks and mortar to online,” Anand Raghuraman, executive managing director at Riveron, said. “I think these companies had to adapt really, really quickly, and ultimately they were able to do it.”
At the beginning of 2020, food companies were tackling anemic growth by tapping into trendy ingredients and brands, Raghuraman said. Many were making acquisitions or starting new brands and lines that hit on trends including plant-based, better-for-you and clean label.
“The name of the game was really product innovation and product expansion, which is something in the playbook that most of them know well,” Raghuraman said.
Companies also had been working to increase profits through what were once key areas to help save money: zero-based budgeting, cutting back on suppliers and operating as cheaply as possible.
Sales changes varied in size and impact when compared with the pre-pandemic year
Year-over-year percentage changes in sales from quarterly earnings reports from the previous two years.
As the pandemic’s threat became imminent, consumers flocked to grocery stores and depleted shelves. And while they emptied quickly, bringing immediate sales bumps to many manufacturers, refilling those shelves became an issue. It took companies quite a while to figure out how to operate with this new normal: higher demand — even after the initial pantry-stocking phase because many foodservice dining rooms were closed — and realities of adjusting manufacturing, suppliers and supply chain to meet this demand and keep everyone safe.
“Some of the over-focus on efficiencies to offset the slow growth hurt these companies a lot,” Raghuraman said. “A lot of the empty shelves can be attributed to … [an] overly high focus on cost, which, if it hadn’t been the pandemic, would have been applauded by the investors.”
Burt pointed out that many of the trends food companies had started to invest in prior to the pandemic didn’t change — they just accelerated. For example, functional nutrition was becoming a more important product category pre-pandemic, providing consumers with items that would nourish them and improve their health. Manufacturers were also working to meet the growing demand for food to enhance the gut microbiome. And as the coronavirus swept the world, consumers reached for that type of product much more quickly.
E-commerce was also an up-and-coming area for food shopping before the pandemic, but it was struggling with widespread adoption. In 2020 alone, grocery and food e-commerce jumped ahead to levels predicted in three to five years, Burt said. According to statistics from Brick Meets Click and Mercatus, $64.4 billion was spent on online grocery shopping between March 2020 and February 2021. More than 69.7 million people regularly used online grocery shopping in January, the firms found.
More predictive-tech-centered systems, like those using data analytics for manufacturing efficiency and improving offerings to consumers, were finding their way to companies’ future plans at the beginning of 2020, Haas said. Some were planning incremental changes at the beginning of the past year to start wading into these areas. The pandemic created a situation where they could take a much deeper dive. Those that were ready to move forward with these upgrades found they paid off, Haas said.
“Supply chain and manufacturing has been a huge driver of performance and, I think, arguably a place that was less of a focus before — versus the commercial side of the business and driving growth … through innovation or marketing,” Haas said.
“The first 10 weeks of the pandemic, we saw 10 years of development, … whether it was the whole shift from bricks and mortar to online. I think these companies had to adapt really, really quickly, and ultimately they were able to do it.”
Executive managing director, Riveron
The pandemic also revived several categories that had been somewhat dormant. Canned goods had not been doing well in terms of growth and innovation, Burt said. Manufacturers were looking for ways to revive brands that were household names but that many consumers saw as staid and overprocessed.
“What revived it was that all of a sudden people wanted to have a stockpile of food and that lasted for a long time … that’s highly shelf stable that tastes good,” Burt said. Consumers soon discovered the innovations that manufacturers had made through the years to improve their products.
A large part of succeeding in the food and drink business is getting consumers to actually taste a product. This increased trial can help ensure product success in years to come, Burt said.
And with grocery shelves emptying, as well as homebound consumers hungry for something new, there was a lot of trial of new products. Nearly four in 10 consumers tried a new brand during the pandemic, Haas said. There are also many who went back to “comfort brands” they knew and already trusted, even if they didn’t buy them that often before.
“Getting trial is one of the most difficult things, right? And they have gotten that trial,” Haas said. “And so now it’s up to them between product renovation, between innovation, to really drive that sense of value for the consumers that keep them coming back.”
Here we grow
Line charts of many companies’ sales from the past year in the thick of the pandemic and a year before are rather striking.
For the most part, they show two parallel line shapes, with pandemic sales being roughly and consistently the same amount above those pre-pandemic. Companies with a diverse slate of brands, including Kraft Heinz and Campbell Soup, seem to have had all of the same seasonal highs and lows — just at a higher sales level.
Looking at the CPG industry as a whole, the pandemic brought a lot of the growth back to Big Food, Haas said. Previously, Haas said, the largest manufacturers only captured about 30% or less of total segment growth. The rest of the growth went to challenger brands and private label.
Since the pandemic started, about 40% of all growth has gone to Big Food, Haas said. Challenger brands took a big hit at the beginning of the pandemic because of supply chain issues, but were able to rebound by early June 2020 to get to 30% of the growth. Private label brands, she said, are still growing, but it’s been at a slower rate than before.
Big Food leaders have appreciated the pandemic-fueled growth.
At the beginning of 2020, General Mills had forecast 1% to 2% sales growth for the fiscal year, a notable step up from the previous year, CEO Jeff Harmening said in his February presentation at the virtual Consumer Analysts Group of New York conference. A year later, what the company actually saw was 8% organic net sales growth, as well as double-digit gains in adjusting operating profits and diluted earnings per share.
Mondelez also saw across-the-board growth, with 80% of its products holding or gaining market share in the previous year, Executive Vice President and CFO Luca Zaramella at the virtual conference.
“Getting trial is one of the most difficult things, right? And they have gotten that trial. And so now it’s up to them between product renovation, between innovation, to really drive that sense of value for the consumers that keep them coming back.”
Partner, McKinsey & Company
Conagra President and CEO Sean Connolly said in his CAGNY presentation that the company’s total retail sales have grown by more than 18% during the pandemic.
“Not only did COVID accelerate sales, but it also accelerated new buyer acquisition,” Connolly said. “Since the onset of COVID-19 in mid-March , we’ve gained the equivalent of an estimated four and a half years worth of incremental new buyers.”
At CAGNY, Kellogg CEO Steve Cahillane ticked off many of his company’s accomplishments during the past year. Improved household penetration. Continued momentum for growth. Keeping manufacturing going and maintaining employee health through a challenging time. Increasing shareholder dividends and accelerating share buybacks.
But the pandemic was the reason for all of that — and it made the price of success high.
“The year 2020 was a year like none other. And hopefully one that will never be repeated,” Cahillane said.