Consumers' healthy habits eating into the packaged foods industry

[WASHINGTON] The strategies of some of the largest US packaged foods companies appear to be running up against their shelf life.

This week, Kraft Foods said its profits fell 62 per cent last year, results that led chief executive John Cahill to call 2014 a "difficult and disappointing" year for the company behind Jell-O and Oscar Mayer.

Kellogg, which also reported earnings this week, said comparable sales for 2014 were down 2 per cent, with an even steeper decline in its North America division. And while chief executive John Bryant promised that 2015 will be a "rebuilding year" for the cereal maker, Kellogg also cut its guidance for long-term revenue growth.

Meanwhile, ConAgra Foods, whose brands include Chef Boyardee and Swiss Miss, cut its profit forecast for the year.

These companies have had a variety of headwinds to contend with recently, including a strong dollar that has made their products more expensive abroad and the high price of cheese and beef. But those are temporary challenges. Their real problem is a much thornier and enduring one: Consumers' eating habits are changing, and they have been having a hard time keeping up.

Kellogg, for example, saw sales tumble 5.7 per cent last year in its US "morning foods" category, which includes cereals such as Corn Flakes and Raisin Bran. And the struggle in this business segment is not new: Sales have been weak for years, part of the reason the company announced plans in 2013 to lay off 7 per cent of its global workforce.

Think about how much breakfast routines have changed, and it makes sense. People are increasingly seeking out on-the-go options such as a granola bars and Greek yogurt that they can scarf down easily during their commute. Fast-food chains have been gunning hard for your breakfast money, with McDonald's wooing customers with free coffee and chains such as Taco Bell entering the morning fray.

And, the way we watch our waistlines has changed, which is especially noticeable in the trajectory of sales in Kellogg's Special K brand.

The cereal aimed at dieters hit shelves more than a decade ago and gained traction in an era when counting calories was the weight-loss routine du jour. Kellogg's has expanded Special K to include snacks such as bars and crackers. But the latest diet crazes are low on carbs and heavy on protein, and that's been tough for Special K, which, despite its promise of "11 essential vitamins and minerals," counts rice, wheat and sugar as its key ingredients. The company said declining sales in Special K products were one of the chief drags on its earnings this quarter.

Kraft has had some success adapting to these latest diet fads with products such as the P3 Portable Protein Pack, a combo of meat, cheese and nuts that it is marketing to millennial-generation men. The company says that product has helped boost sales in its refrigerated meals category.

But Kraft saw sales fall 6.6 per cent during the fourth quarter in its meals & desserts division, which includes legacy brands such as Kraft Mac & Cheese and Velveeta dinners. Kraft said the decline reflects "changes in consumer preferences," which is likely a reference to the myriad studies that show millennials are hungry for fresh food and they are more concerned than previous generations with where their food comes from. In other words, a millennial looking for an on-the-go dinner might pass on the gloppy cheese and noodles wrapped in plastic, instead opting for a fresh salad assembled at their grocery store's prepared food bar. (Or a made-to-order burrito at Chipotle.) This emerging preference for freshness also helps explain the troubles at ConAgra's Chef Boyardee brand of canned pasta dinners and its Healthy Choice line of frozen dinners. But the weakness at those two brands was not what led the company to trim its profit outlook. That move was largely based on weak profitability in its private brand business, which manufactures store brand pastas, snacks and other items for a variety of retailers. The company expects profitability in this division to suffer in part because of their own "execution shortfalls," but also because the competition is getting ferocious.

ConAgra said on Thursday it had named a new chief executive, Sean Connolly, who would take over in April for retiring leader Gary Rodkin. And Cahill, Kraft's new chief executive who took the helm in December, announced he was shaking up the company's top management. Perhaps these changes at the top will help these companies find ways to bring shoppers back to the center aisles of the grocery store.

WP