The ongoing US economic recession has produced some sobering figures, with little relief in sight. National unemployment approached 9% in March and April 2009 according to the Bureau of Labor Statistics, the highest rate in 25 years. In April, the recession passed the 16-month mark, making it the longest period of US decline since the Great Depression.
As recently as July 2008, the International Monetary Fund had predicted a return to economic growth in 2009, but projections released in April now have the recovery starting in 2010 at the earliest.
As the reality of the recession settles in, consumers have begun to alter their food purchasing behaviours. Those living from pay cheque to pay cheque, and even those with steady incomes, have begun to look for ways to stretch their dollar as they’re faced with persistently high prices. Many are making fewer shopping trips and migrating towards Wal-Mart, discounters and dollar stores, yet there are still plenty of opportunities for food and beverage manufacturers if they know where to look.
While tighter budgets have caused consumers to pull back their spending on discretionary items, the poor economic conditions have been a boon for US sales of meal solutions, a category that includes ready meals, soup, canned, chilled, dried and frozen processed food, plus sauces, dressings and condiments.
Euromonitor International had previously predicted a 1.2% retail value sales increase in 2009 for the category, but is now projecting a 1.5% increase for the year to $98bn. Sales increases in 2010 and 2011 are expected to be at 3% in constant 2008 value terms, up from a previous average of 1% annually.
One of the primary ways consumers have looked to cut costs is by dining out less. As they find themselves cooking at home more often, consumers have searched for quick, convenient ways to replicate restaurant quality food in their own kitchens, with chef-inspired soups and restaurant branded frozen foods used to fulfil that role.
More recently, manufacturers have highlighted the value behind their products, touting them as inexpensive alternatives to restaurants. Campbell Soup Co ran ads contrasting their soups to a McDonald’s meal, saying they were ‘the original dollar menu’. Nestlé offered its Lean Cuisine main course meals at five for $10. ConAgra threw marketing support behind its $1.50 Banquet frozen ready meals for the first time in more than 10 years. New interest in meal solutions is occurring at both high and low price points.
From a manufacturing standpoint, the chief strategy to counteract rising costs has been to simplify or reformulate foods. General Mills reduced the number of pretzel shapes in its snack brands from 14 to three, for a cost saving of $1m. The company also halved the number of pasta shapes in its Hamburger Helper brand, allowing for a 10% reduction in production costs and allowing for smaller packaging. Kraft reformulated its Miracle Whip dressing, substituting water for some soya oil content and also changing the packaging from glass to plastic.
At the same time, food companies are looking to refresh their brands’ images by enhancing the value they offer to consumers. Frito-Lay recently added 20% more product to many of its snack brands while keeping the price constant, hoping that the concept of value for money would lure consumers back to a non-essential food category. Del Monte is also advertising its canned fruits and vegetables as offering more value than fresh or frozen foods. Consumers seem to be willing to purchase items in several different categories, as long as they feel they’re not sacrificing too much in quality or nutrition.
The consumer desire for value can only go as far as their reduced budgets will allow. While the bulk purchasing popularised by club stores offers lower prices per unit, many consumers no longer have the ability to spend large amounts of money on any one single item. Instead, they will typically purchase the same items, but in smaller quantities from week to week.
This has been particularly true for nutrition/staples, a category including bread, cereals, dairy products, pasta, noodles, rice, baby food, spreads, oils and fats, and meal replacement products. Euromonitor International had previously anticipated a 2.1% retail value sales gain in 2009 for the category, but now predicts growth of just 1.7%, to reach $115bn in 2009.
The ongoing response to this trend is for manufacturers to offer products in smaller sizes. General Mills began to reduce pack sizes for its cereals as far back as June 2007, passing along unit price increases that consumers seemed willing to absorb. Other companies offer discounts on existing smaller sizes, such as Campbell Soup Co, which ran offers of single cans of soup for $1 or two for $3 in some stores. Manufacturer interest in technologies and solutions that allow for smaller sizes and reduced packaging is likely to continue even after the current economic downturn.
Sales of impulse and indulgence products, a category that includes confectionery, pastries, cakes, biscuits, ice cream, snack bars and sweet and savoury snacks, have remained somewhat resilient. Previous Euromonitor International projections had retail value sales increasing 1.7% in 2009 to reach $111bn, and the updated outlook is about the same.
However, growth over the past few years has been primarily led by premium products, and in 2009 this was expected to shift as consumers traded down to established mid-priced and economy brands, or private label, but purchase them in larger volumes.
There are still opportunities within impulse items for premium products to have success, though. One example is the 2008 launch of Hershey’s Bliss, a luxury chocolate line marketed specifically towards women, whose sales exceeded expectations even as most premium chocolates saw slowdowns in growth.
Finding a specific niche demographic group and targeting the snack portion of the day is a combination that can still reap rewards, and Mars Inc has already responded in 2009 with Fling, its own small, luxury chocolate bar aimed at women.
The current economic downturn has already had an impact on sales of health and wellness foods and beverages, many of which are priced somewhat higher than standard products. Organics, functional foods and other speciality products had enjoyed double-digit sales gains until 2008, and these categories have undergone marked slowdowns in more recent months. Shoppers have turned away from upscale grocery chains like Whole Foods and have become more frugal with their purchases.
Nevertheless, demand for health and wellness products like organics is expected to remain strong in 2009 and beyond, due to a few factors. Typical consumers of these products have higher than average disposable incomes, and in general have not been hit as hard by the recession. Price disparities between health and wellness foods and standard items have shrunk, with some products such as low-fat condiments, low-fat crackers and diet carbonates with average prices the same as their full calorie counterparts.
In addition, overall retail value sales of health and wellness products still comprise less than 20% of packaged foods sales, so there remains plenty of room for expansion.
The steadiest trend that will drive future interest in health and wellness products, however, is a continued concern for obesity and the onset of ageing-related diseases. Satiety and weight control, cardiovascular health, brain health, liver health and the effects of ageing on the skin are all areas that can be addressed through diet and nutrition, and foods in the marketplace that target these needs should continue to grow in sales.
Retail sales of beverages are expected to be more adversely affected by the ongoing recession, with sales either slowing or declining in nearly every category. As with foods, there are some areas that hold promise, however. RTD (ready-to-drink) teas are still a relatively small category that should continue to benefit from the combination of refreshment, lower caffeine levels and natural antioxidant health properties that has fuelled its growth over the past five years. Euromonitor International expects US retail sales of RTD tea to accelerate to 7% growth in 2009, to reach $3.7bn.
Powder concentrates is another category that stands to benefit from the current economic downtown. Several teas, sports drinks and juice brands also come in powder form and saw growth through 2008 by marketing themselves as quick, easy additives to be mixed with water to provide greater levels of energy, antioxidants, electrolytes and other nutrients than water alone. Often, these would come in single-serve packets for greater convenience, and the overall cost would be less than buying such products ready to drink.
This value proposition should prove alluring in 2009 and beyond, extending even to established brands such as Kool-Aid and Tang that don’t necessarily carry with them the health benefits of newer entries. As consumers look to cut back spending, they’ll become more concerned with stretching their dollars for the greatest amount of drink volume possible, and powder concentrates remain uniquely positioned to offer just that.
Even within categories expected to see declines, growth is possible for products featuring specific ingredients that hold appeal. Perhaps the most visible trend in this direction is the move towards the use of cane sugar instead of high fructose corn syrup. Brands such as Jones Soda, Snapple and now Pepsi and Mountain Dew Throwback (launched in May 2009 by PepsiCo Inc) all feature the use of sugar as a more natural sweetener.
The desire for natural alternatives has also manifested through the recent launches of products featuring stevia, approved by the FDA in December 2008. Consumers are attracted to these sweeteners because they feel they’re less processed, even though it’s questionable whether they offer more health benefits than other sweeteners.
The current economic downturn has led consumers to alter their spending behaviour as they learn to stretch their dollars further. This is increasingly true even for consumers at higher income levels. The mentality of the US consumer has changed, to the point where they now search for value at whatever price point they’re comfortable with. For some, this means trading down to discounters and private label brands. For others, it means leaving the upmarket retailer Whole Foods to find the same organic products they desire at lower prices elsewhere. In either case, opportunities remain for companies who can find ways to offer the consumer value for money.
Brian Morgan is senior US research analyst at Euromonitor International.
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