Skipping the Canadian market
Two food companies recently discontinued well-known brands in the Canadian market. Mondelez opted to discontinue its iconic Dad’s chocolate chip cookies, while U.S.-based Hormel Foods announced it was pulling Skippy peanut butter from Canadian shelves. Given what is happening in Canadian grocery, we shouldn’t be surprised to see this trend continue.
Essentially, national brands are losing ground to private labels and fresh products. Grocery stores are expanding the perimeters where produce, bakery, deli, meat and seafood occupy the store. This means companies such as Sara Lee, Kraft Heinz, Hormel, Mondelez and Kellogg are losing ground. On average, consumers are spending approximately 74% of their time where fresh products are displayed. This trend is increasing as more consumers look for fresh, not processed foods. The middle of the store sees less traffic these days, which is impacting sales for most grocery products.
Grocers are desperate to increase centre of store sales. Some are attempting to boost sales by launching categories or leveraging their private label brands. But, managing a food store is a merchandising nightmare compared to 30 years ago. The number of food items in a typical store has increased by more than 600% over the last few decades. Consumers are bombarded by choice. We've seen innovations such as coffee pods and gluten-free products that have garnered fascinating results. But, these categories can go only so far and both appear to have reached their full potential.
Real estate in store aisles can be expensive for national brands. In addition to listing costs, companies pay a premium to effectively display their brands to consumers. Meanwhile, grocers are trying to promote their own private labels as margins are much higher. Major global food processors have had to increasingly pay more to get consumers’ attention. Higher input costs and the will to build economies of scale has led to more consolidation in global food processing. We've seen several transactions in recent years and there's more to come.
Several Canadian grocers have put more pressure on multinationals by asking them to reduce wholesale prices, simply because they can. Unlike the U.S., just a few players dominate the Canadian food retailing landscape. An oligopoly allows main grocers to set the tone on how pricing works across the system. Still, profit margins remain modest due to higher than average logistical costs. So, chances are this vendor-grocer tug-of-war is likely to continue.
Our market is also a tricky one for major food processors. With barely 37 million consumers in one of the largest countries in the world, logistical costs can be prohibitive. Companies need to have a comprehensive portfolio of brands to make anything work on any balance sheet. Companies such as Nestle and PepsiCo are less likely to discontinue certain products in Canada while selling these same products elsewhere. Food processors are becoming more strategic about what and where to sell. In an era where mass commercialisation is less than appealing for any of the global food companies, a more targeted approach has more merit these days.
But, seeing major national brands leave is not necessarily undesirable. In fact, it could lead to greater opportunities for entrepreneurs in Canada. Canadian-based food processors could potentially fill the void with locally manufactured food products. Now, if we can just learn how to embrace the notion of food innovation, have more venture capital available to entrepreneurs, get more skilled labour and improve market access domestically and internationally, we could see more domestic food processors succeed.
This can’t happen overnight -- a lot of work needs to be done. A strong food processing sector increases the chance for any nation to gain control of its food destiny. This is certainly a worthwhile goal to pursue.
