No Time to Panic: Part 1, Smart Responses from Food Industry Leaders

Amid the dire economic
headlines of the past several weeks, two stories about food
production in the Wall Street Journal caught my eye. 
They both point to strategic course corrections that food companies
are making to respond to accelerating input costs and
pocketbook-conscious consumers.  They both remind us that the
seemingly ironclad policies and practices that exist in our
organizations are only relevant in the context of the
macro-economic environment in which we operate. 

Both articles address responses to margin erosion, the
first through branding: 

“Kellogg Co’s new advertising push for staple
cereals such as Corn Flakes and Rice Krispies, while Campbell Soup
Co. is about to launch a multimedia campaign to trumpet its
condensed soups as a ‘bargain buy’. Kraft Foods Inc.
has begun advertising its Kool-Aid powdered beverages on national
radio for the first time in 11 years.”

The second
article describes how food producers are reinforcing their
margins through recipe management: 

“Hershey Co. is substituting vegetable oil for a portion
of the cocoa butter traditionally used in some of its chocolates.
Spice maker McCormick & Co. is now supplying food companies
with cheaper spices and new flavor blends, such as Mexican oregano
instead of pricier Mediterranean oregano.”

The impulse might be for consumers, employees and stockholders to
be horrified by such changes.  But instead, they should be
delighted that the leadership in these great businesses has the
courage to adjust its strategies.  For many years, while the
external market has been buoyant and consumer sentiments high, food
makers rightly focused on high margin, premium products. 
Middle managers may have started to think that the emphasis on
premium products was some “sacred cow,” but it was
actually a business “norm” that reflected the market at
that time.  Today, the market is changing and the
“norm” is shifting, as well it should.  

What would be the alternative to change?  Steadfast adherence
to the status quo, both in brand management and recipe management,
would only cause the premium brands to lose market share to private
labels.  And part of this loss would be permanent, since a
switched customer is hard to recover.  Wouldn’t a
cost-conscious consumer prefer a changed recipe to a higher price,
in order to enjoy a familiar and trusted name brand?  The
decision-makers of the companies cited in the articles believe so
– and so do I.

Yet, I am certain that the changes in strategy described in these
articles have met with much resistance from the managers of these
respective brands and recipes.  But the King is the Market,
not the Manager.  I applaud the executives who had the vision
to make these course corrections.  The world is changing
– rapidly – and now is no time to bury our heads in the
sand to remain loyal to old practices that worked in a different
macro-economy.  

Since these articles were published, prices for many food
commodities have dropped, providing some relief.  Food share
prices have been heavily sheltered from the recent turbulence on
Wall Street, as they are a staple and a safe haven in troubled
times.  We may not be going out to buy a new car or out to
dine, but we can bolt the door and enjoy a family meal together
around our dining room table.  However, it would be a mistake
to confuse this stock price strength with a relaxation in the need
to increase profitability.

Here, two “sacred cows” of the food industry have been
re-examined.  In my next blog post, I will address a third
that, in my view, needs a fresh look: the operation of the factory
itself and some managers that have realized an additional source of
margin recovery may not be where they thought it might be. 
The question will be, can they let go of the sacred cow to make an
impact on the share price? I argue: that is their job.