A potential merger between food giants Kraft Heinz and Campbell Soup would “not be a bad thing” and would play into the wider trend of “legacy CPG brands making an attempt to transform with the changing consumer”, according to a key industry analyst.
Talks of Kraft Heinz acquiring Campbell’s have dragged on in investor circles during the past couple of weeks, almost 18 months after its unsuccessful approach for Unilever.
Dan Neiweem, co-founder and principal of e-commerce specialist Avionos, told FoodBev that the motivation for either company was clear.
“While Campbell’s has certainly watched its business struggle over the past few years, it’s not the only packaged food company that’s seen stocks fall in recent months,” Neiweem said. “Shares of ConAgra and Mondelēz have ‘lagged the S&P 500 during the past year’. Campbell’s willingness to seek a potential acquisition is a move to stay afloat in a crowded space and perhaps innovate to make healthier, fresher products that consumers are more willing to buy. At the end of the day, if brands don’t evolve and adapt to consumer demands, they might as well close their doors.
“The acquisition would be beneficial to both Campbell’s and Kraft Heinz. Both companies have struggled over the past few years to keep up with the ever-changing grocery industry. Together, they could reinvent their brands with a unified strategy to create products that can compete against fresh, organic options that are increasingly available in mass-market grocery stores and online.”
Campbell’s is arguably in a vulnerable position, having posted a gross loss of $475 million in its third-quarter results published in May despite seeing net sales increase by 14.7%.
Underneath the hood, the company’s financial performance is characteristic of the packaged food sector: shrinking sales and worsening top-line performance underscored by a focus on margins and consolidatory bottom-line growth.
Excluding benefits from the acquisition of Pacific Foods, Campbell’s sales of soup in the US decreased 1% in its third quarter, driven by declines in condensed soups and partly offset by gains in broth and ready-to-serve products.
“Consolidation is not a bad thing in today’s landscape,” Neiweem says – and now could be the time for an approach, given that Campbell’s is without a permanent figurehead since Denise Morrison announced she would retire in May.
“There are several factors leading to the drive for transformation in the CPG industry. First, consumers’ expectations for farm-to-table, organic, fresh foods is pushing CPG brands to think outside the box and integrate healthier options into their product mix. Also, with Amazon’s acquisition of Whole Foods and Walmart’s drive for low prices and constant brand evolution, even the largest packaged food companies are looking for any way to stay alive in the competitive grocery landscape.
“Legacy CPG brands are finding it hard to compete as shoppers are increasingly purchasing fresh, healthy, and on-demand groceries at the same low prices. This environment has left CPG companies with even smaller margins. This potential acquisition of Campbell’s is Kraft Heinz’s way of staying competitive and relevant.”
Neiweem believes that Kraft Heinz – itself at the mercy of mixed financial performance – could decide to use consolidation as a means of complementing other strategies, like the incubator programme it launched in March.
“The Kraft Heinz brand is definitely under pressure to update its brand to compete in the grocery space – or it risks closing its doors. Brands that fail to evolve won’t succeed in today’s marketplace. Consumers now demand low prices, personalisation, speedy customer service and a digital presence where they can learn more about the product or purchase it online.”
Failing to adapt puts Kraft Heinz CEO Bernardo Hees under the same sort of pressure that seemed to hasten the retirement of Denise Morrison following Campbell’s third-quarter results announcement, and almost certainly led to the departure or Irene Rosenfeld as CEO of Mondelēz.
“By combining capabilities, Kraft Heinz and Campbell’s have the chance to reinvent their brands and adjust to changing consumer expectations. Because legacy CPG brands are struggling to keep up, they’re unable to lower their prices and make them more competitive with other providers or innovate their classic products and update them for today’s consumer. That’s why these companies have begun looking at other options like M&A and incubators – they automatically infuse new thinking into their processes and culture.
“In this situation, consolidation is one approach that may end up layering with others like incubation. Right now, these companies are looking to leverage new, agile, and digital ways of fostering innovation.”
It’s this sentiment that has motivated the likes of Chobani, PepsiCo, Anheuser-Busch and Nestlé to all develop incubator programmes of their own, often in conjunction with M&A strategies.
Neiweem continued: “Consolidation means that consumers will have the potential to buy healthier, cheaper products from their favourite brands [but], while nostalgia plays some part in keeping Campbell’s and Kraft Heinz around, it doesn’t outweigh the experience of shopping today.
“What used to be about an exchange of goods is now about the experience of making a purchase, whether that be at the corner market or online. The ability for brands to meet consumer demands and expectations is what’s going to resonate with buyers – not just the soup they ate as a kid.”
Severin Weiss, CEO of SpecPage, agrees that a merger would likely be good news for shoppers.
“The Kraft-Campbell’s merger would be beneficial for consumers who demand more – and more accurate – labelling,” he told FoodBev. “Many reliable sources say that packaged food companies are struggling, and I agree. I believe they’re struggling because consumers are demanding to know what is in their food and how and where it is sourced – and many labels are either incomplete or insufficient. I believe that the merger would be a win for consumers – and for both Campbell’s and Kraft – if they focus on what customers want: a diverse product line that is natural, if not organic; tastes great; and has attractive, accurate, traceable labelling that clearly indicates what and how much of each ingredient are in the foods that they consume.
“Of course, it is all speculation, but I can certainly see how consumers will benefit from the increased traceability and labelling process upgrades that Campbell’s would enjoy, if they merged with Kraft.”
Neiweem adds: “Consolidation is not a bad thing in today’s landscape. It shows legacy CPG brands making an attempt to transform with the changing consumer and making an effort to keep up with emerging start-ups and incubators.”
If Kraft Heinz pursues Campbell’s further, that’ll be why.
© FoodBev Media Ltd 2019
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