Food Makers Hope Snacks Bring Big Profits In Small Packages
March 15 2012 - 1:58PM
Dow Jones News
Food companies are reaching for the snack bowl.
Facing stagnant growth in their base grocery business,
packaged-food companies are increasingly turning to snacks as an
avenue for growth. The companies hope to capitalize on American
consumers who continue to snack more throughout the day, and on
trends in developing markets, such as more women entering the
workplace and the spread of modern retail formats.
Snacking "is a long-term trend and the future of eating," said
Gary Stibel, chief executive of the New England Consulting Group,
which has advised such clients as PepsiCo's Frito-Lay, the largest
salty-snack player in the world by sales. "You and I will continue
to snack more and sit down to a meal less."
Analysts and companies project that there's enough growth to go
around in the $560 billion global snacks market, as measured by
Euromonitor Inc., for most food companies to take a bite. So even
as such smaller snack players as ConAgra Foods Inc. (CAG) or
General Mills Inc. (GIS) try to get bigger in snacking, such larger
players as PepsiCo Inc. (PEP), which owns Frito-Lay, and Kraft
Foods Inc. (KFT) need not worry about losing any market share.
"There's plenty of room. The global market's very fragmented,"
said Lee Linthicum, Euromonitor's head of global food research.
Another incentive is the fact that snack prices can be raised
more easily than those of some grocery staples, according to
analysts. Snacks generally start at lower prices and offer the
added value of convenience, for which shoppers are willing to pay
more. They're also generally bought on a whim, such as when drivers
fill up their tank at gas stations or shoppers pick up a
prescription at a drug store, making them an afterthought that
satisfies an urge.
The companies are attacking snacks in different ways. Frito-Lay
is focusing this year on adding more premium- and lower-priced
chips to its portfolio to capitalize on more growth in those price
ranges. ConAgra, meanwhile, is introducing already-popped Orville
Reddenbacher's popcorn in ready-to-eat bags. ConAgra's also
unveiling a frozen Greek yogurt product in June that it will market
as a snack rather than a dessert.
Kellogg Co. (K) is taking the acquisitive route with its pending
$2.7 billion deal for Pringles. General Mills also made a small
deal, recently buying Food Should Taste Good Inc., which makes
tortilla chips in such flavors as sweet potato and chocolate, to
take advantage of the growth in snacks and natural products.
Kraft, perhaps, is embracing the divergent performances of snack
and grocery foods most wholeheartedly with plans to separate its
North American grocery business from its snacks division, which
will include Oreo cookies and Cadbury candy. As for emerging
markets, the company believes snacks are an easy way to penetrate,
since snacking habits are just developing and are more similar
among countries than are meals.
"The way that people snack from one market to another is a lot
more similar than it is different," Kraft Foods Chief Executive
Irene Rosenfeld said in a recent interview.
For companies other than Kraft, the growth traits that snacks
exhibit may offset challenges that packaged food giants face in
their traditional grocery businesses. Goldman Sachs analyst Jason
English said food makers' sales are at risk of slowing this year as
an improving economy causes more consumers to eat meals at
restaurants, reversing a trend of eating more at home during the
downturn. Moderating input costs also mean that food makers won't
raise prices as fast, robbing companies of a sales driver.
The food industry faces a "sales-growth vacuum where volumes
aren't there and prices aren't there," English said.
Snacks can pick up the slack, with sales volume holding up well
to price increases. Some categories, like candy, can also still
benefit from raising prices. This week, Goldman Sachs upped its
rating on Hershey Co. (HSY) to buy as it sees the chocolate
company's sales holding up well. "You are seeing snack foods once
again resume their leadership role as a growth driver in the
industry," English said.
-By Paul Ziobro, Dow Jones Newswires; 212-416-2194;
paul.ziobro@dowjones.com
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