There Goes The Rainbow Nut Crunch
Go into any supermarket, and it's hard to miss General Mills Inc.'s (GIS ) storied brands. The packaged-food giant makes everything from Cheerios cereal and Progresso soups to Green Giant frozen vegetables. But in the coming year, shoppers may find it harder to find their favorite size or flavor. On June 30, General Mills announced it would trim by 20% this year the number of products it sells.
General Mills is not alone. From H.J. Heinz Co. (HNZ ) to Hershey Foods Corp. (HSY ), most big packaged-food companies are weeding out their slow-sellers. In part, they are doing so to cut costs in the face of rising commodity costs. But there's more to it. Increasingly, the food companies are taking their orders from Wal-Mart Stores Inc. (WMT ), which wants only products that fly off its shelves. At the same time, the food brands are being crowded out by grocers' own labels. "It's getting a lot harder to survive on the store shelf," says Gary Chartrand, chief executive of Acosta Sales & Marketing Co., the nation's largest broker for food and consumer products.
Higher commodity prices, insists Minneapolis-based General Mills, are a key reason it is winnowing its product lines. Prices of soybean oil and cheese have risen by 70% and 80%, respectively, in the past year. At General Mills, that translates into a 10% boost in commodity costs, or $165 million, estimates Deutsche Bank Securities. Killing off one-fifth of its products will help cut costs because the company will be able to focus on better-selling items.
Scaling back on products could boost profits. But it hardly assures sales growth. Consider Heinz, which in the past two years has shed 40% of its items to concentrate on fast-movers such as ketchup in an easy-to-pour upside-down bottle. "We want to focus on products that are No. 1 or No. 2 in their categories," says Ted Smyth, a Heinz senior vice-president. The move seems to have paid off. In fiscal 2003, operating income rose 17.5%, to $1.38 billion. But unit volume growth remained virtually flat at 0.4% last year. "It remains to be seen whether putting resources behind fewer brands ultimately leads to better growth," says Deutsche Bank analyst Eric Katzman.
But foodmakers have little choice -- thanks to Wal-Mart's growing clout. Unlike other grocers, it doesn't charge suppliers "slotting fees" to put goods on its shelves. It goes with what sells, bumping up to 20% of its products each year, say analysts. What's more, the nation's biggest grocer carries 20,000 fewer items than most supermarkets, says consulting firm Retail Forward Inc., meaning more competition for shelf space.
Big supermarkets such as Kroger (KR ), Safeway (SWY ), and Albertson's (ABS ) are making life harder for foodmakers, too. To differentiate themselves from Wal-Mart, they are expanding their produce, deli, and meat departments. But those products typically are sold around a store's periphery, shrinking space in the center aisles where packaged foods are sold. Grocers are also moving faster to introduce their own brands. During the past decade, store label products have risen from 15% of total grocery sales to 20%, according to Midwest Research. These are not the drab generic products that your mother bought but range from premium ice cream to microwavable meals of comparable quality to the national brands.
Pressure on packaged-food companies will only worsen. That's because Wal-Mart, too, is continuing to expand its private labels. In five years, says Retail Forward, the giant's own brands will account for 25% of its grocery sales, up from 20% today. Just one more reason why the battle for shelf space is going to get tougher and tougher.
By Robert Berner in Chicago, with Diane Brady in New York and Wendy Zellner in Dallas