BOCA RATON, FLA. — Eighteen months after the Kraft Foods Group set a course following its separation from Mondelēz International, the company is facing an “unprecedented confluence of factors that has the potential to change the way we operate for perhaps decades to come,” said Tony Vernon, chief executive officer.
Mr. Vernon told the Consumer Analyst Group of New York conference taking place this week in Boca Raton that the question he most often receives from industry observers is what has most surprised him over the past 18 months?
“What surprised us most has been the pace of change in the markets we serve, what is being bought, where it is being bought and how purchases are influenced,” he said.
Mr. Vernon called current events the “three ‘Cs’ of change,” and include consumers, customers and communication.
“The face and behavior of the North American consumer is undergoing dramatic change, income, demographics, (and) values,” he said. “The first aspect of our change in consumer base and probably the one that has been talked about the most for the past several months is the bifurcation of consumer spending power.
“The second factor is cohorts. There are two very large growing cohorts that are rapidly coming into prominence from a purchasing power perspective. Hispanic consumers represent 17% of the U.S. population and are projected to represent 60% of U.S. population growth from now until 2016 reaching more than 20% of the total U.S. population by 2020.”
The second cohort within the consumer sector that has Mr. Vernon’s attention is millennials.
“This group, including my three sons, is largely single, channel agnostic, highly connected, inclusive, very diverse, and greatly in need of meal-based solutions.”
Finally, Mr. Vernon said the food and beverage industry needs to come to grips with the fact the simple label wave is more than a trend.
“ … Consumers (are) seeking more fresh real foods that are made with simple ingredient lines and we have to think as this is more than just a premium trend,” he said. “There is a cultural shift at work here, a shift where for more and more people the foods they eat and how they are made is a reflection of their values. Freshly made and simple ingredients are becoming primary purchase drivers and we must incorporate this into our new product development and brand renovation plans.”
Customers, the second ‘C’
Mr. Vernon said that retail trends are really just manifestations of consumer trends and that the consumer trends he outlined, specifically those related to how consumers are shopping, are having a significant impact on the retail industry.
“Discovery and quick trips are less planned and more impulse oriented,” Mr. Vernon said. “Fill-in and stock-up trips are those visits where you are going with a list in your hand and are unlikely to deviate from the plan. What we are seeing is that planned trips are increasingly dominating the mix. In fact, more and more often we are seeing consumers using the stores as their pantry. This is a huge change in shopping behavior.
“It is largely a reflection of the income pressure on American families. It also explains why consumers have become less responsive to promotional programs that so many companies in our industry are hoping will boost their volumes.”
As consumer shopping trips migrate to more non-traditional retail channels the results are having an effect on food and beverage companies, Mr. Vernon said.
“More important to us, however, is that the retailers that make up these nontraditional channels of trade, namely club and dollar stores, are more of what you would call item merchants versus full category managers,” he said. “That means if we want our brands to compete effectively in those channels we have to have a unique price pack, variety combinations in a single unit to satisfy the consumer for that specific purchase occasion.
“In most cases, more cases than not, it is a significantly different price pack architecture than what is appropriate for traditional channels of trade or center of store.”
The big ‘C’ – Communication
Quoting Facebook chief operating officer Sheryl Sandberg, Mr. Vernon noted that “the speed of change will never be slower than today.”
“What this means for our business is that the notion of digital and data-ready mediums being small is simply untrue,” Mr. Vernon said. “Also, at current growth rates, the scale and penetration of digital and mobile alone provides marketers the opportunity to have conversations with consumers at an individual level versus the mass marketing that we have all grown up with.
“As a marketing company, it means that as we put greater focus on what is effective in the context of efficiency, and how we go about measuring, we must change that as well. As I said, an unprecedented confluence of factors that has the potential to change the way we operate for a long time.”
Mr. Vernon said he has heard all of the bearish talk about the food and beverage industry’s prospects, but said he is not buying it.
“In fact what I have just described tells me that our opportunity to build revenue driven profit growth resides in these key areas,” he said.
Using communication as an example, Mr. Vernon outlined how Kraft is using data to drive marketing and product innovation decisions.
“You may not know this but Kraft has been a publisher of great food and recipe content for decades,” he said. “It started with our Food and Family Magazine and has expanded to our digital assets that now attract 250 million visits a year. Consumers view our recipes on Kraftrecipes.com or our Hispanic web site, ComidaKraft.com, 1 billion times a year. This is where scale and breadth of portfolio can give Kraft a significant competitive advantage as a destination for meal solutions.
“We use the data that this consumer traffic creates to drive our decisions, the precision of our marketing content and better measure our return on investment. In fact, our digital marketing group generated about $80 million of savings in 2013 because they were able to achieve the same if not more quality impressions at a lower cost. In other words, they helped us become more effective in a more efficient manner in today's digital world.
“The other thing we gained from this tremendous set of assets is insights that inform innovation in branded renovation.”
It is in brand renovation that Mr. Vernon sees tremendous opportunity to capitalize on a number of current trends.
“When you consider the fact that we have 10 brands that each generate $500 million or more in annual revenues, renovation is a big opportunity for us,” he said. “At the same time, we have to approach innovation and renovation through the lens of key consumer trends and insights.
“We know consumers at all income levels are looking for more nutritious, better-for-you products. Here we are talking about the traditional approach of applying the science of nutrition to improve the profile of our products through calorie reduction and limiting unwanted sugar, sodium or fats or adding beneficial ingredients, food groups and nutrients to our products to encourage better overall nutrition.“We are also talking about recognizing other consumer trends, including a desire for more products with simpler ingredient lines that is made with no artificial colors, flavors or preservatives. And related to that, we are looking at how we can address the growing interest in where our food comes from and their journey from the farm to the consumer's table.”