As consumers increasingly lean toward fruits, vegetables, grains and meats unsullied by preservatives and sweeteners, food makers including J.M. Smucker Co., General Mills Inc. and Conagra Brands Inc. are looking to reshape portfolios to shed slow- or no-growth units. Instead, they’re looking to refocus on foods that can boost revenue in a world where Millennials -- with roughly $4 trillion in spending power—and Gen Z buyers rule.
In July, Smucker said it was selling its U.S. baking unit, including Pillsbury, to Brynwood Partners to focus on innovation in segments such as coffee, peanut butter and snacks, many of which can be marketed as healthful. Other companies are working on similar moves, analysts say.
“A lot of consumers see big, giant companies as providers of highly processed and preserved foods,” said Pinar Hosafci, a food industry analyst for market researcher Euromonitor International Plc in London. “Divestitures have to do with the fact that Big Food really wants to change their image.”
Many large food sellers built up product portfolios over the last 25 years, either by developing their own processed foods or by acquiring brands, according to Brian Callaci, a managing director for the New York-based investment bank Moelis & Co. While some remain profitable, sales have slowed as food consumption patterns have changed, he said.
General Mills, which also uses the Pillsbury brand for frozen biscuits and refrigerated cookie dough, has said it wants to divest 5 percent of its portfolio to pursue growth elsewhere, including in cereals and yogurt with less sugar.
Meanwhile, an emerging wave of relatively new leaders at companies including Mondelez International Inc. and Hershey Co. have been aggressively targeting a younger demographic that has shown little loyalty to long established brands.
Mondelez Chief Executive Officer Dirk Van de Put, who took the helm in November 2017, has led a “comprehensive review” of the company’s markets and business, which has included connecting with consumers. The company is trying to figure out how to fuel new growth by providing the right snacks to on-the-go consumers working longer hours.
“In order to fund future acquisitions, we will continue to evaluate our portfolio, so we are deploying capital in the most effective way possible,” he said. “This means we may divest certain non-core assets.”
For chocolate maker Hershey, the trends have meant selling off a potato chips product and buying a brand called Smart Puffs, among other items, from B&G Foods Inc. Smart Puffs advertises itself as a gluten, preservative and trans fat-free snack, baked using Wisconsin cheese and U.S. corn.
“Snacking goodness without the guilt,” is how it’s described online.
Hershey has said it will operate within the company’s “better-for-you” hub in Austin, Texas, which has been focused on driving growth in the warehouse snacking aisle with Skinny Pop and Oatmega.
The bet among analysts is that other industry stalwarts are also looking to refigure portfolios to keep up with the times.
Conagra Brands agreed to buy Pinnacle Foods Inc. in June, seeking to bolster its footprint in the freezer-aisle with brands such as Birds Eye, and the Gardein line of vegetarian products. Even Millennials, known for their foodie tastes, are embracing frozen meals, which are convenient and less expensive than takeout.
The pressure on packaged-food makers to get more efficient has intensified in the aftermath of Whole Foods Market Inc.’s sale last year to Amazon.com Inc. Frozen food is relatively resistant to Amazon’s push to get shoppers to buy online because they’re tricky to deliver.
In a September interview, Conagra CEO Sean Connolly said future divestitures could include part of the Pinnacle Foods portfolio. Among those products is a baking segment that includes Duncan Hines cake mixes, which Pinnacle said in its August earnings call has come under pressure.
The challenge is to find willing buyers that will pay up. To do so can mean selling assets for relatively low gain. In Smucker’s case, the baking business was sold for $375 million, just barely above the unit’s annual revenue.
Smucker “received serious interest from several potential buyers for the U.S. baking business and are confident we received fair market value for it,” Tina Floyd, senior vice president and general manager of consumer foods, said in an emailed statement.
Part of the issue is that food manufacturers that might be potential buyers are searching for ways to reduce their own costs, increase distribution efficiency and open up international markets as they face pricing pressure from the likes of Amazon.com Inc. and Walmart Inc.
Who’s left? Private equity firms that have the focus and financing to undertake a turnaround.
Smuckers believes the baking business will have “a better opportunity to thrive” under Brynwood Partners because the private equity firm intends to focus on the baking category and given its history of buying and growing consumer brands, Floyd said.
“You have to consider strategic and private equity buyers, but with the complexity of a carve-out, private equity is your usual ride home,” said Tim Larsen, a Managing Director in Houlihan Lokey’s Consumer, Food & Retail Group. “The thesis behind these brands is that they’ve been mismanaged or treated as non-core for so long, there’s an opportunity with investment of capital and management talent that you can improve the product."