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 Even though Applegate executives sought to reassure people that
their products -- hot dogs and deli meats prepared without
antibiotics or the added nitrites often found in processed meats –
wouldn't change under Hormel's ownership, it was a tough sell with
some consumers.
For those shoppers, the feeling was, "I really struggle with putting
any of my dollars into Hormel's pockets," said Neil Leinwand,
Applegate's senior vice president of marketing. "We just reinforce
that every time a consumer is buying an Applegate product, they are
supporting a farmer, they are supporting a network."
Hormel's experience illustrates the challenge large food
manufacturers face when they acquire smaller natural and organic
companies. Big food and beverage makers such as Campbell Soup Co,
General Mills Inc and Coca-Cola Co, facing sluggish U.S. sales
because their processed foods and sugary drinks are increasingly
viewed as posing significant health risks, have been buying such
brands to tap into a faster growing market and win credibility with
consumers.
But so far, two aspects of that strategy – using economies of scale
to build up the smaller brands while keeping costs low, as well as
altering existing negative perceptions of the parent company – have
proven difficult to achieve. Many health-conscious consumers and
retailers have lost trust in the big food manufacturers, and even
buying an organic or natural food maker won't necessarily restore
it.
Meanwhile, some shoppers at natural goods retailers said that if
their favorite organic brands were to be acquired, they would no
longer want to buy them.
Lori Keslowitz, 31, a special education teacher who shops once a
week at the Park Slope Food Coop in Brooklyn, New York, said she
avoids products sold by manufacturers like General Mills, Mondelez
International Inc and Kellogg Co, including their organic or
natural brands.
"I would not trust it as much as I would a smaller business run by
local people," she said. "I would assume that when a smaller company
is being bought by a larger company, they usually have to modify
their products to meet the needs of a larger amount of people."
To satisfy the concerns of consumers like Keslowitz, acquirers
including General Mills and Coke are leaving in place management
teams at the companies they buy and using the relationships forged
by the smaller brands to win more shelf space at natural goods
retailers including Whole Foods Market Inc and Sprouts Farmers
Market Inc, according to interviews with executives at the large
manufacturers and their smaller brands.
The reason is that natural goods stores represent one of the fastest
growing areas of food retailing. Sales at natural and organic
retailers rose 9 percent in the past year, compared with a 1.3
percent gain at supermarket chains and other conventional retailers,
according to data from Spins, a market research firm that tracks
data from store scanners.
For investors, the risk is that a hands-off approach to the way
organic brands source ingredients and produce their food limits the
ability of their corporate parent to cut costs, and reap greater
profits.
"These small companies are high growth, and they trade at pretty
high multiples, but there's not that much they can do to take costs
out of them because you can't integrate them into your business,"
said Dan Wald, a partner at Boston Consulting Group.
With a company that has unique ingredients, a separate supply chain
and a different approach to marketing, "those really big drivers of
cost reduction get pretty small quickly," Wald said.
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It can also create other types of tension. Applegate and Annie's
Inc. – the organic macaroni and cheese maker bought by General Mills
– pledge not to use genetically modified ingredients and support
labels on food that is GMO. Their parent companies oppose state
labeling laws.
STAYING ON THE SHELVES
Getting onto the shelves of natural food retailers isn't the same as
gaining space in supermarkets, a distribution channel that larger
food manufacturers know well. Many stores have extensive product
requirements and are vigilant about checking ingredients. While most
won't remove a brand from stores just because it was acquired, there
are exceptions.
For example, Brooklyn's Park Slope Food Coop won't carry Coke
products because it believes the company has prohibited its workers
from organizing in certain countries outside the United States. When
Coke bought a stake in Honest Tea in 2008 and eventually acquired
the company, the Coop stopped carrying its products and found
substitutes.
"Since we don't have anything owned by Coke, we have to keep an eye
on what they are buying," said Ann Herpel, a manager at the Coop.
Seth Goldman, co-founder and CEO of Honest Tea, said all of the
company's bottled teas are now fair-trade certified, and that most
other retailers that initially dropped the product had restored it.
"From our perspective, we've deepened or doubled down on the things
that really defined our brand," he said.
Larger food companies said they have changed their usual order of
business to build ties with natural goods retailers. General Mills
said it is using Annie's sales force and its third party broker
Presence Marketing/Dynamic Presence to gain more shelf space for its
other health-focused brands, such as Larabar energy bars and Food
Should Taste Good snacks.
Meanwhile, Annie's says it has benefited from General Mills'
knowledge in certain product categories like soup as well as its
relationships with manufacturers.
"The idea from the beginning was let's get everything we need from
the mother ship and keep everything else away," said Annie's
President John Foraker.
Indeed, General Mills Chief Executive Ken Powell said that the
company learned over the years to take a hands-off approach with the
natural and organic brands it acquires.
"If we understand what they want and we give them what they want,
we're fine," Powell said. That entails allowing Annie's management
team to run the show, for the most part. "We leave them alone and
let them chart the course for the brand," he said.
(Reporting by Anjali Athavaley; Editing by Michele Gershberg and
John Pickering)
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