The high cost of living in America has compelled many individuals to make adjustments to their budgets. Discretionary spending on items like apparel and home goods has taken a hit as people try to manage their expenses. However, one essential expense that remains unchanged is food. So, why are packaged-food makers experiencing a decline in sales?
The answer to this question is multifaceted, much like the layers of an Oreo cookie. At the peak of the pandemic, packaged-food makers thrived due to increased snacking and brand loyalty. This allowed them to raise prices effortlessly. Additionally, investors sought refuge in consumer staples during the market turmoil of 2022, which further boosted these companies' stocks.
Unfortunately, the tide has turned, and the situation is not looking favorable for the packaged-food industry. Consumers are now resistant to higher prices and have the option to dine out again. As the market rallied this year, investor interest in traditional staples dwindled, resulting in declining stock values for packaged-food companies. Moreover, elevated valuations and ample alternatives have made yield-hungry investors less interested in these stocks within a high-interest-rate environment.
Despite the decline in sales volumes, people still need to eat. This raises questions about the reasons behind this trend. TD Cowen analyst Robert Moskow believes there are three main factors contributing to this decline, which he predicts will persist in 2024 unless companies take substantial measures to lower their prices.
Price undoubtedly plays a role. Food companies argue that high grocery bills have prompted consumers to tighten their belts both figuratively and literally. Moskow concurs with this standpoint, stating that consumers are now more conscious of waste, avoiding impulse purchases, and seeking cheaper alternatives.
However, this explanation seems insufficient since grocery store volumes have only experienced a modest decline of 1.8% over the past 52 weeks. In contrast, major packaged-food companies have witnessed an average decline of 4.6% during the same period. Some prominent players in the industry, such as Conagra Brands, General Mills, Kellanova, and Kraft Heinz, have even seen their volumes drop by 6% or more in the year ending September 2023.
In light of these circumstances, it becomes crucial for packaged-food companies to delve deeper into understanding the factors driving this decline. While price plays a role, other underlying dynamics may be at play. As the industry faces these challenges, finding innovative solutions will be paramount to regain consumer interest and reverse the downward trend in sales volumes.
Shifting Consumer Preferences
According to the expert, approximately 40% of the decline in packaged food consumption can be attributed to consumers gravitating towards alternatives like fresh produce, meat, deli, and bakery products. These segments have consistently outperformed the packaged food category, indicating a shift in consumer preferences for healthier and more natural options.
Market-Share Loss and Emergence of Private Label Brands
An additional 10% of the decline in packaged food consumption is believed to be a result of market-share loss to private label and emerging brands. Private-label brand sales have been on the rise, driven by shoppers seeking more affordable options. Over the past 52 weeks, big food companies' volume growth has trailed that of their respective categories by an average of 2.3%. To put it into perspective, if these companies had maintained their market share, their volume growth would have reached 2%.
Impact of Weight-Loss Drugs
While it remains uncertain whether the increased use of GLP-1 drugs for diabetes management and weight reduction has directly contributed to the decline in packaged food consumption, there is a possibility that it could have an impact in the long run. However, further evidence is needed to establish a conclusive link between these drugs and the decrease in volume.
Challenges and Potential Solutions
The decline in volume remains a significant concern for investors, making it crucial for big food companies to stabilize this metric. If cooler weather, holiday shopping, and increased merchandising fail to lift the industry's growth, companies might need to invest in more aggressive pricing strategies to improve their performance.
The Pandemic Effect
There is a growing concern that the recent decline in packaged food consumption might not be a mere blip but rather a reflection of a longer-term trend. The COVID-19 pandemic may have provided temporary relief from the ongoing decrease in demand for packaged food in favor of alternative products.
Evaluating Food Stocks
Out of the 17 food stocks covered by the industry expert, only six hold Outperform ratings. These stocks include Freshpet (FRPT), Lamb Weston Holdings (LW), Mondelez International (MDLZ), J.M. Smucker (SJM), Hershey (HSY), and Utz Brands (UTZ). While this is not an all-encompassing endorsement, it sheds light on the potential opportunities investors might want to explore in the current market landscape.
In conclusion, the packaged food industry is facing a challenging and evolving environment. Consumer preferences are shifting, private-label brands are gaining traction, and the impact of weight-loss drugs remains uncertain. To navigate these changes successfully, big food companies must adapt to the evolving demands and preferences of consumers while finding innovative ways to stabilize volume and drive growth.
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