Consumer sentiment spurring boom of small producers in US food industry

20 September 2016 Consultancy.uk

More and more US consumers are opting for food products that offer wellness benefits, are sustainably produced and lack additives. US consumers are thereby increasingly turning to smaller local producers, for products for which they are willing to sometimes pay substantial premiums. The changing consumer preferences are reflected in growth figures, finds a new report, with small producers significantly outperforming the average, catching the eyes of larger, M&A hungry, rivals.

US consumer interest in wellness and sustainable food products is opening up a market for small, local producers making niche and specialty items. In a new study from AlixPartners, titled ‘Bigger Prospects Take Root for Small Food Producers’, the consulting firm explores recent retail trends in the US food production market, as well as what it means for consumers, incumbents and small producers.

Consumer preferences and willingness to pay premiums, by product category

Eating consumer sentiment

As part of the study the firm seeks to identify changes in consumer sentiment regarding a range of product types as well as their respective willingness to pay premiums for those types of products. Taste remains the main interest of consumers questioned, at 45% of respondents, while a price premium of 10% for a better tasting product is noted. Products that are less processed come second, preferred by around 33% of respondents, while close to 30% are keen on products which are sugar free. All natural products, cited by almost 25% of consumers as preferable, also have price premium at 10%. Around 15% of consumers has a preference for organic products for which a premium of almost 15% was cited, while non-GMO was important to almost 15% of consumers with a cited premium of around 10%.

The growth in popularity of small food producers’ goods, which are often made locally, without processing and using organic or natural ingredients, is starting to be seen back in the numbers even across the largest 100 food producers in the US. The researchers for the report found that sales across the US for the top 100 producers between 2009 and 2014 has a CAGR of 3.3%, with the top 10 outperforming the average with CAGR of 3.7%. The smallest 10 producers, however, managed to significantly outperform both the average and the market's leading players, with a CAGR of 5.7%.

According to the firm’s analysis, a number of factors are buoying the fortunes of small producers, including the ease of national market penetration through e-commerce channels and digital advertising, reduced production costs due to less complex production methods, and reduced ingredient costs due to leaving out the preservatives and additives.

Performance of selected food categories versus brands from the top 100 consumer-packaged-goods brands, July 2014 to June 2015

SME boom

While the long-term trends significantly favour growth of smaller producers on the top 100 list, when comparing companies that operate outside of the top 100 with those in the top 100, an even more stark picture forms of the power that changing consumer sentiment has on both the growth of small scale producers as well as on incumbent corporates. In the Baby Food segment, for instance, the performance of the category between 2014 and 2015 stood at 5%, while the top 100 producers saw a decline of -1.6%. The biggest decline for the top 100 list was found in the Frozen Foods segment, which saw falls of -7.8% for large producers even while the segment was up 3.5%. Cereals too saw a loss for top 100 players, here -5.5%, while the segment as a whole was up 2.4%. The top performer, however, was coffee, up 9.4% as a whole, while top 100 producers managed to just outperform stagnation at 0.1%.

As a result of changing consumer sentiments, as well as scale producers’ difficulty in transforming their operations to meet the more delicate requirements of specialty consumer items, big players are seeking to buy out smaller competitors. According to the report, the improved performance of the top 10 players relative to the average stems, partly, from their acquisition of smaller producers.

The report concludes, “Will David-size US food producers unseat the industry Goliaths? Probably not, but it’s possible small producers will claim a bigger share of the market and push their major competitors to deliver more-rapid innovation in line with changing consumer tastes. To keep driving growth, the major food producers will also likely continue their acquisition efforts. Their biggest challenge lies in targeting the right start-ups and the right small processors and then scaling up production to serve a national market. It’s US customers, whether they’re foodies or non-foodies, who are the clear winners of the rise of small food processors.”

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