Big-Name Food Brands Lose Battle of the Grocery Aisle

By Annie Gasparro 

America's packaged-food giants are losing the battle for retailers' shelf space, complicating their efforts to break out of a yearslong slump.

Instead of promoting canned soup, cereal and cookies from companies like Kraft Heinz Co., Kellogg Co. and Mondelez International Inc., grocery stores are choosing to give better play to fresh food, prepared hot meals, and items from local upstarts more in favor with increasingly health-conscious consumers.

"We've got to maximize return on our shelf space," said Don Fitzgerald, vice president of merchandising at Mariano's, a Chicago grocery chain bought by Kroger Co. in 2015. Shoppers, he said, are drawn to steamy pasta at the store's deli counter, rather than a box of dried macaroni with powdered cheese sitting on the shelf for weeks.

New Jersey-based ShopRite and other grocery-store chains around the country are building new stores that have less space for traditional packaged foods in the center aisles and more for in-store restaurants and fresh meals shoppers can take home. "It's by demand of consumers looking for a quick meal," said Natalie Menza, ShopRite's director of health and wellness.

CVS Health Corp.'s drugstore chain recently said it planned to upgrade hundreds of its stores to focus more on healthier products.

That means less space for traditional packaged-food brands, which are also facing increased competition from store brands and smaller upstarts.

Sales volume for packaged food and products -- reflecting the number of items sold -- fell 2.4% in the first quarter of 2017, according to market-research firm Nielsen. In in the year ended Feb. 25, sales volume for packaged food and beverages shrank by 0.4% -- compared with growth of 1.7% for fresh meat, 1.9% for produce and 4% for deli-prepared foods during that period, Nielsen said.

Three of the biggest companies in the sector -- Mondelez, Kraft Heinz and Kellogg -- are expected to show the impact of these trends when they report first-quarter results this week. RBC Capital Markets' David Palmer recently lowered his forecast for the three, saying in a note to investors that "big food volume trends have not yet begun to recover after six months of accelerating declines."

Teresa Benande, a 70-year-old shopping in a Chicago Mariano's grocery store, said she recently nixed chips and cereal, and now she usually buys chicken breasts, brown rice, potatoes, and fresh vegetables and fruit.

"I stopped buying that stuff because it has too much salt and sugar. Even the boxes that appear healthy, when you read them, they really aren't," she said. When she splurges, it is on a spinach and feta pizza, not a bag of Doritos, she said.

The shift in shopper preferences started several years ago, but its impact on big food makers is intensifying now because of added pressure from retailers.

That has exacerbated what has been a drumbeat of bad news for packaged-goods companies grappling with American consumers' sustained move toward natural, organic foods. A long stretch of falling food prices, fueled by excess supplies of staples like meat and dairy, have also lowered costs for consumers at supermarkets, giving them more reason to choose fresh food over boxed meals.

Plus, more people are buying cheaper store brands and shopping for unique health-focused brands online.

"It's death by a thousand cuts," said Nielsen consumer analyst Jordan Rost.

Mondelez, which makes Oreo cookies and Ritz crackers, initially expected its comparable sales to rise at least 1% this year, but that could decline if its sales results for the first quarter are worse than anticipated -- as was the case with Hershey Co., which reported last week.

Big companies such as Unilever PLC and Nestlé SA said in April that North America food sales are underperforming as customers avoid the center aisles of grocery stores.

Mark Clouse, Chief Executive of Pinnacle Foods Inc., which sells Duncan Hines cake mixes and Vlassic pickles, said no one factor alone was driving the industry's woes, and he was optimistic about early sales figures from April. "But I think it will be a tough environment" this year, he said.

Mariano's Mr. Fitzgerald said his stores, like other retailers, aren't giving up on big brands. But finding new ways to entice people to walk through the center aisles again is tricky.

Some brands are seeking ways to get their products into the fresh and prepared foods section of the store. But, Mr. Fitzgerald says: "If we overrun perishables with all the big packaged brands, we lose our competitive edge."

Instead, retailers such as Wal-Mart Stores Inc. are pressuring big brands to lower their prices as a way to attract customers.

Companies like Hershey and PepsiCo Inc. said they are working with retailers to be creative. "That's a conversation we've been having with some of the retailers, to say 'how can we help you rethink the center store so that we can bring growth back," said Pepsi Chief Indra Nooyi on a conference call last week, when it reported declines in its Quaker Foods division. "Our hope is that with the rejuvenation of the center store, our categories will grow, too."

Big brands are increasingly focusing on improving profitability through cost-cutting and consolidation.

Kraft and Heinz combined two years ago as slow growth spurred a need for savings. Kraft Heinz Co. has been able to cut more than $1 billion from the two predecessor companies' budgets. Earlier this year, it made an unsolicited $143 billion offer for Unilever -- the Anglo-Dutch maker of Dove soap and Hellmann's mayonnaise -- which was rebuffed.

Some analysts say Kraft Heinz's sights could be set on Mondelez, which unsuccessfully attempted to buy Hershey last year. They argue that such an union would benefit both companies and make them better equipped to deal with the new reality of slowing sales and heightened competition.

Both companies have declined to comment on a potential deal. Kraft and Mondelez used to be part of the same conglomerate until 2012, when it was split in two.