Declining unit volumes a mystery
March 13, 2012
by L. Joshua Sosland
Unit sales volume of 14 of the top 20 food categories fell over the past year in an unprecedented and poorly understood decline creating extraordinary pressure for the processed food industry.
While the weak economy and rising prices have been cited as contributing factors, the explanations do not appear to offer a complete answer to why many generally stable categories, beginning with milk and bread, have experienced such steep declines.
According to data provided by SymphonyIRI Group, unit sales of bread, cereal, soup, baby formula, vegetables, shortening/oil, canned/bottled fruit and seafood each sustained declines of more than 3% over the past year. The categories account for annual sales of $31 billion.
The SymphonyIRI Group data include scanner results from supermarkets, drugstores and mass merchandisers (not including Wal-Mart Stores, Inc.). The hypothesis that the declines reflect a shift in sales to other channels (such as dollar stores) is undercut by the strength of the beverage category (see table on Page 28). While declines were sustained in milk and carbonated drinks, 7 of the top 10 beverage categories experienced sales increases over the same period food sales were fading.
Concerns about broad weak-ness in volume began to emerge in the middle of last year.
“Simply put … the U.S. has stalled,” Irene Rosenfeld, chairman and chief executive officer of Kraft Foods Inc., said in August. “In the 19 largest food and beverage categories, the average growth rate has plunged from about 5% compound annual growth to essentially flat last year.”
Since then, trends have worse-ned, and the volume declines were on the minds of most of the food company executives presenting last month at the Consumer Analyst Group of New York annual conference in Boca Raton, Fla.
“We’re just going through a year where we have the highest inflation that we’ve had since I’ve been in the business, the pricing that goes along with that and volume, a negative volume elasticity, that is associated with that,” said Kendall Powell, chairman and chief executive officer of General Mills, Inc., Minneapolis.
More expansive still at CAGNY was Anthony Vernon, executive vice-president of Kraft Foods Inc., and president of Kraft Foods North America.
“We believe the economic, consumer and customer en-vironment will continue to be difficult,” Mr. Vernon said. “For the 40% of Americans who make less than $40,000, for the 20% who make less than $20,000, there is no real recovery. In these core consumers, we found real elasticity issues in the face of pricing to commodities. At Kraft, we believe we have an obligation to these consumers and our customers to offer great brand value at entry level price points, to offer good-better-best choices and even to democratize our health and wellness offerings to make them more affordable.
“When we do these things, even in the face of a tough economy, we drive traffic, value and brand loyalty.”
Citing Nelsen data, Mr. Vernon said total U.S. food and beverage volume fell 2.4% in the 52 weeks ended Dec. 24, 2011.
Others captains of the food industry weighed in as well. Gary Rodkin, chairman and c.e.o. of ConAgra Foods Inc., Omaha, said “current marketplace dy-namics have made it more difficult to deliver growth.”
Richard Smucker, executive chairman and c.e.o. of The J.M. Smucker Co., Orrville, Ohio, said, “Consumers are managing their expenses and making do with less.” He continued, “As a result, overall volume in retail food, including many of the categories that we participate in, has declined.”
The volume decline is big news and a genuine mystery, said Harry Balzer, chief industry analyst and vice-president of The NPD Group, Port Washington, N.Y.
“It’s impossible that people are stopping eating,” Mr. Balzer said. “There is no evidence of that. But total volume declining at supermarkets is a big story. I don’t think anyone has the answer to this.”
Mr. Balzer said painting the food industry with too broad a brush stroke will generate incorrect conclusions.
“Every category has its own unique issues,” Mr. Balzer said. “The decline in bread is one that I’ve been looking at since September. But that represents a drop of sales in measured channels. In food service, 3 of the 10 fastest growing restaurant groups is a sandwich chain.”
Mr. Balzer said the food service industry is recovering but not nearly enough to account for the volume declines, since 80% of food is eaten at home. Each 1% decline in food at home should equate to a 4% increase at food away from home, he said.
Home dynamics also may be contributing to the broad-based decline, Mr. Balzer said.
“No one knows what’s happening to the pantry,” he said. “The question with bread is that if you have a 20-slice or 16-slice loaf. At one time were you throwing away 4 slices or 2 slices, and now you are throwing away none.
“I think everyone suspects people are economizing, using more of what you have. Pricing alone will not cause you to eat less. You can’t. You need to eat. It will cause you to change how you eat. It’s not like gasoline where you stop or cut back on driving.”
Average caloric intake has declined from levels several years back, but the shift did not occur in 2011, Mr. Balzer said.
“We are cutting back on calories,” he said. “It is a headwind that we aren’t getting heavier. There are plenty of data that we have maxed out. It’s a trend for the last five or six years in which energy expended equals energy intake for the average American.”
Mr. Balzer emphasized that overall food consumption simply should not decline in a nation in which population continues to grow by nearly 1 per cent per year.
“I’m surprised it’s taken this long to ask about the volume decline,” he said. “The data aren’t clear. There has to be an answer.”