In Food, Small Is Big

It may seem as though only those living in big cities are driving the foodie trend, but talk to anyone at a large packaged food brand and they’ll tell you the desire for niche, artisanal, natural, and organic products is widespread and growing quickly. According to a recent report by investment banking firm Jeffries called “Food: The Curse of the Large Brand,” large packaged food companies are losing market share with their mainstream brands. Those, like Hain Celestial (HAIN, makers of Celestial Seasonings tea, as well as Greek Gods yogurt and the organic baby food lines Earth’s Best and Ella’s Kitchen), that have managed to incorporate more niche brands into their portfolios, either through development or acquisition, show growing revenues. According to the report, entitled “The Curse of the Large Brand,” those companies that have failed to go small (Kellogg Kellogg Company, K, for example) or added the wrong sorts of small products (like Snyders-Lance, LNCE) are losing out.

“The majority of the branded packaged food companies in our coverage show declining market share in scanner data,” writes report author and Jeffries equity analyst Thilo Wrede. “The likely culprit is a growing disinterest in mainstream processed food brands esp. among Millennials. Large brands across most relevant packaged food categories are declining in scanner data while small, nichey brands grow.”

While most Americans are more interested in healthier foods and authentic brands than they were 10 years ago, the bigger consumer shift away from large brands is primarily being driven by Millenials, who by and large have as little interest in processed foods as they have in big brands in any market category. With weak, if any, allegiance to mainstream brands, an affinity for locally made goods, and an openness to new types of products, Millenial shoppers have large packaged food companies scrambling to serve them. Larger food companies need to be able to adapt quickly or risk losing market share rapidly and permanently.

According to the Jeffries Food report, nowhere is this trend more evident than in the coffee and yogurt markets, where shifts toward craft roasters, single-cup brews, and Greek yogurt have left large companies scrambling to regain customers in the last two years.

“Ground coffee has seen a particularly large shift from large to smaller brands,” Wrede writes. He attributes the change mostly to a shift in preference from roast and ground coffee to K-cups, which (in their branded form – Nielsen does not break out private label K-cups) accounted for just 2.2% of the ground coffee category in CY09 but has grown to 23.5% of the category.

Similarly, changing tastes have had a dramatic impact on the yogurt market. “The most meaningful share loss for large brands occurred in yogurt due to the shift to Greek yogurt, which Nielsen treats as a separate category of sub-brands–i.e. Yoplait Greek (GIS), Dannon Oikos, and Stonyfield Greek (both Dannon) are all listed as separate brands,” Wrede writes. “However, even including them in their parent brands, the loss for these three brands together would have still added up to 18.5 points. The big gainers are, not surprising, Chobani (+16.8 points) and Fage (+2.6 points).”

At the same time that large brands are scrambling to adjust to shifting market preferences, more and more small food brands are launching all the time. On our accredited investor crowdfunding site, many of our most successful raises are for niche food products (Rhythm Superfoods and Little Ducks Organics, for example). Just as large brands in the personal care industry have become quite good at snapping up the best small brands to diversify their portfolios,  large food brands will continue to acquire more small brands to keep up with consumer demand.

All of which is great news for those interested in either launching or funding a small food brand. And for those of us who like to see a lot of variety at the grocery store.