Following is a transcript of the interview by Matt Levine of Cornucopia Show podcast in mid-September, released on November 3, 2017 MATT LEVINE: We're here with Mike Movitz. Mike, good to have you back on Cornucopia. MICHAEL MOVITZ: Thank you, Matt. Good to be back. MATT LEVINE: Let's talk about Campbell's, a company that made canned foods a staple in every American kitchen and currently a company that's undergoing a lot of transformation. Before we begin I'll just read a list of a few of the brands they own: Prego, Spaghetti O's, Pepperidge Farm, Bolthouse Farms, V8, Pace Salsa, Plum Organics baby food, and most recently the purchase of Pacific Foods, natural and organic soup maker. Mike, give us a little update on what Campbell's has been doing and why it's important in terms of this current shift in consumer focus away from more processed to less processed foods. MICHAEL MOVITZ: I think to understand where Campbell's is headed, we need to understand the context of what's happening in general in the traditional food world. There is a seismic shift taking place on many fronts. For one, consumer eating habits have changed dramatically. When we think about the idea of three square meals a day, only five percent of consumers are actually eating three square meals a day. That is a thing of the past. Ninety percent of consumers today snack multiple times a day, and the lines between snacking and a meal is blurring. There's changes in demographics; changes in how people are interacting with and thinking about the importance of good food in their life; a consumer’s ideas about a company’s transparency, how they relate to that company, how authentic a company is, the values that company has and do they relate to the consumer’s values; Of course, there is e-commerce, digital and mobile technology disrupting retail and our shopping and buying habits; home delivered meals, meal kits, and prepared foods; and the shift from what we call center store of non-perishable products to the perimeter departments where the refrigerated and fresher food departments are. Whether that's dairy, produce, deli, meat, seafood, prepared foods, et cetera. All of these changes have been occurring at a at breakneck speed, much faster than companies were prepared for, nor was it really foreseen coming. This is a very fluid and new dynamic that literally is rewriting the playbook for the path to consumer as we speak. Traditional CPG companies really were built on a business model of scale for efficiency that really hindered their ability to adapt, respond, react and move with any kind of speed. The natural, organic and specialty products industry had been growing well for a long time and suddenly it has become much more front center – it is driving all the growth. More than $20 billion in market share has been lost by traditional CPG over the last five or so years.
and it's all moved to these smaller start up, natural, organic and premium product companies. As traditional CPG has started to grasp what has been changing, companies are starting to change, or as they like to say, they're “modernizing their portfolio”. They're also looking to improve their portfolio through mergers and acquisitions, buying companies like these natural organic brands. Buying these companies is almost like replacing their R&D, research and development, budgets, as efforts have shifted more to investment and acquisition of companies because it gets them to that point faster. In fact, there's almost a billion dollars in venture capital funds now available from about 10 or so traditional CPG companies: General Mills, Campbell's, Pepsi, Kellogg's, Tyson, Coke, Purina, Unilever, and Mars. They all have venture funds now generally$100 million or more with the intent and purpose of investing in these smaller upstart brands to try to get a jump on some trends. In the process they get access to a consumer base, know-how in the marketplace, and a supply chain that is already where the traditional CPG wants to go. But again, because of their size and scale, they can't just turn on a dime. They have billions of dollars in existing sales for their traditional products, so even though the growth is coming from healthier, fresher, more transparent companies and products, it's not where all the business is right now. They can't convert their entire portfolio overnight as it does take time, but not every consumer wants this new stuff either. As they transform themselves internally very slowly, along the way introduce some new products, make incremental changes to existing products, invest in new companies and acquire others. All of these moves help them move towards that transformation. MATT LEVINE: Mike, let's go back to their current competitive landscape. Basically they're in the center of a storm. Where do you see the ability of these large CPG to revamp some of their brands? MICHAEL MOVITZ: There are leaders, there are followers, and there are laggards in the process. I will tell you without a doubt a doubt Campbell's is absolutely the leader among its peers for making these kind of changes, bold statements, and aspirational visions of who they want to be and what they want to become. There are many other companies that are making changes, but not to the extent that Campbell's has declared. MATT LEVINE: What happened to Campbell's much louder launch in 2015 of Campbell's organic? Why did the Campbell's branded effort under their own name fail and why did they then turn to buying up a company for an extremely high price of a similar product, similar package, and similar price point? MICHAEL MOVITZ: Campbell’s organic soup hasn't failed. It's still very much in play and is a key part of the Campbell's soup strategy. Additionally, they just introduced a whole new line called “Well Yes”, which is a canned soup but very much in the model and image of a traditional natural foods company. It's very unusual for a consumer to only be shopping one particular type of product or brand, so having both does allow for reaching those different consumer types. And as I mentioned a moment ago that a natural food company, particularly of the size and breadth of Pacific Foods, has an established brand equity and consumer following that Campbell’s can tap into and make even stronger by putting the brand into their own distribution system, leverage the efficiencies of their supply chain, and its marketing power. MATT LEVINE: Given the small margins in the soup and grocery category in general, one of the things I always think of when I read about these acquisitions is when Clorox bought Burt’s Bees for just under a billion dollars and a short period of time later had written down the value of that acquisition and taken a net loss of $250 million. Campbell’s purchase of Bolthouse Farms for I think it was $1.3 billion in 2012 – in your mind are they clearly adding opportunities by expanding their base to cover for a lack of innovation within the organization? MICHAEL MOVITZ: I don't want to speak to valuations - time will tell on valuations and what companies spend on those acquisitions. But the intention and the strategy behind those acquisitions is pretty clear in terms of buying a company and harnessing its success. Consumers have preferences - a consumer that shops for Brand A versus a consumer that shops for the Campbell's organic version have very different profiles, needs, interests, values, buying behaviors and levels of engagement with their food. The reason why we have so many different choices in the supermarket is because there are so many different preferences, drivers and criteria a consumer has when buying a product so there needs to be products that meet those myriad possibilities. I want to address your question about innovation because it’s actually a word that gets thrown around prolifically by traditional CPG companies. There's three kinds of innovation: One is where you identify a use case and create a product or a different form of the product for that use case. For example, yogurt traditionally has been in a cup and you need a spoon. Years ago a company identified the opportunity to make yogurt portable and available on the go so it was packaged in a tube. You could just tear open the tube and eat it as you go, and you don’t need a spoon. Same product in new delivery system, form or package to meet a use case that a consumer might not otherwise be able to consume the product. The second kind of innovation, which I don't think innovation is actually the right term for it, is more like a combination, but it gets called innovation. For example, to eat a S’more you would buy your chocolate bar, graham crackers, and marshmallows, heat it up, and make a sandwich. In combination ‘innovation’ a company combines the three products and creates a ready-to-eat S’more that you don't have to cook and can eat whenever and wherever you want. Sure, it permits consumption of the product when you're not around a fire to melt your marshmallow, but nonetheless it's not as exciting as the third kind of innovation, which is true innovation in my opinion, where entirely new product categories are created and disrupt existing categories: Kombucha, meat alternatives, non-dairy beverages, aromatherapy, super foods, chia, flax, hemp, and on and on. And these almost always emerge from the natural products industry. So true innovation is not where you incrementally change something within a commodity category, it’s literally creating a new product altogether, something that wasn't there, and disrupt an existing category. So when it comes to innovation, traditional CPG is oriented to a use case packaging change or a combination of products, which also helps them limit their risk. However, consumers today are looking for true innovation, and exploring new flavors of the world. The way for CPG to do this more quickly is to buy a company that's doing it already and proven the concept. One other consideration is a traditional CPG stands for something in a consumer's mind, and to introduce something too cutting edge or too innovative becomes a disconnect for the consumer. The consumer then is not quite sure how to approach this unfamiliar thing from a company they think of as being something else. This is why CPG tend to make either incremental changes to their existing products to be more on trend with some of these attributes, or acquiring or investing in these newer brands that are doing it from the start. MATT LEVINE: One of the things that I find fascinating if you go back to the 80s, Lipton had bought Celestial Seasonings and then they sold it back to Mo Siegel, the original founder. Kraft at that point had bought Lifestream which is now the Nature’s Path brand and sold it back to Arran Stephens. Welch’s had bought Cascadian Farm and sold it back. In the 2000s you had a variety of brands with Frito Lay Naturals, Nabisco was doing some of their crackers as organic, Prego had an organic line at that time. So, this almost like CPG Organic 3.0. It's like their third time around? MICHAEL MOVITZ: This is different because this is permanent. This this is a reflection of cultural changes, buying habit changes, technology influences, et cetera. And a very different marketplace. These are not what's hot and fashionable for the period. These are permanent shifts in how we eat, where we eat, and what we eat. I want to mention some of the things that Campbell's declared at their annual investor meeting this past July, because they do differentiate themselves as a stand out among their peers in terms of where they want to go and how they want to transform. Denise Morrison, CEO, made some very bold declarations. She said the true north of the company is that Campbell wants to be the leading health and wellbeing food company, and they want to be the standard bearer of transparency for food companies. She also said health and wellbeing is the lens by which all new products are being developed because the future of food is rooted in health and wellbeing. She said the need to change is urgent, and companies who don't evolve to align will be extinct like the dinosaurs. Campbell’s will be the ones to watch. For now their financials don't reflect that vision because they are in an investment and transition period. Its stock price is down while investors wait to see what happens. Campbell’s will go through these growing pains and transition pains, but at the end of the day Campbell has declared it's very distinct vision and sounds deliberate and determined to get there. Many other CPG companies are making some changes while holding onto their past, products, ways of thinking, ways of doing things, and so forth. Campbell’s is really changing the way they think and evolving with the times. I think they're really to be commended for that. The investor community is fleeing traditional food stocks and traditional retail right now because of the investments that are being made by these companies to adapt to the New World Order. I mean literally the playbook is unfolding before our eyes. A lot of this stuff has never been done before by the public companies. There's no playbook or benchmark, so that uncertainty creates fear and risk for investors, especially when they evaluate things quarter to quarter. A lot of them have exited or put hold or sell ratings on these stocks, but there are some that do believe in that longer-term vision and longer horizon for a return. The reality is right now nobody knows how long this is going to take. Nobody knows where the bottom is. Nobody knows what it looks like on the other side. And then of course you have Amazon in the mix. It's a time of uncertainty but that uncertainty is an opportunity. It’s an opportunity to change which also means big investments. And nobody knows who's going to win yet. MATT LEVINE: That's our show and other geeky episode is in the books. Check out earlier episodes of Cornucopia on our web site, cornucopia.show. Thanks again to Mike Movitz. Learn more about him at movitzgroup.com. Thanks again. This is cornucopia. Comments are closed.
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About The Author...Michael Movitz has more than 25 years natural/organic products industry experience across retail, manufacturer, broker and market research organizations... Archives
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