When Hormel Foods Corp, maker of Spam canned meat, said it was buying Applegate Farms in May, fans of the organic and natural meat company lamented its takeover by Big Food on social media and questioned whether product quality would go down. Even though Applegate executives sought to reassure people that their products - hot dogs and deli meats prepared without antibiotics or the added nitrites often found in processed meats - wouldn't change under Hormel's ownership, it was a tough sell with some consumers.
For those shoppers, the feeling was, "I really struggle with putting any of my dollars into Hormel's pockets," said Neil Leinwand, Applegate's senior vice president of marketing. "We just reinforce that every time a consumer is buying an Applegate product, they are supporting a farmer, they are supporting a network."
Hormel's experience illustrates the challenge large food manufacturers face when they acquire smaller natural and organic companies. Big food and beverage makers such as Campbell Soup Co , General Mills Inc and Coca-Cola Co, facing sluggish US sales because their processed foods and sugary drinks are increasingly viewed as posing significant health risks, have been buying such brands to tap into a faster growing market and win credibility with consumers.
But so far, two aspects of that strategy - using economies of scale to build up the smaller brands while keeping costs low, as well as altering existing negative perceptions of the parent company - have proven difficult to achieve. Many health-conscious consumers and retailers have lost trust in the big food manufacturers, and even buying an organic or natural food maker won't necessarily restore it. Meanwhile, some shoppers at natural goods retailers said that if their favourite organic brands were to be acquired, they would no longer want to buy them.
Lori Keslowitz, 31, a special education teacher who shops once a week at the Park Slope Food Coop in Brooklyn, New York, said she avoids products sold by manufacturers like General Mills, Mondelez International Inc and Kellogg Co, including their organic or natural brands.
"I would not trust it as much as I would a smaller business run by local people," she said. "I would assume that when a smaller company is being bought by a larger company, they usually have to modify their products to meet the needs of a larger amount of people."
To satisfy the concerns of consumers like Keslowitz, acquirers including General Mills and Coke are leaving in place management teams at the companies they buy and using the relationships forged by the smaller brands to win more shelf space at natural goods retailers including Whole Foods Market Inc and Sprouts Farmers Market Inc, according to interviews with executives at the large manufacturers and their smaller brands.
The reason is that natural goods stores represent one of the fastest growing areas of food retailing. Sales at natural and organic retailers rose 9 percent in the past year, compared with a 1.3 percent gain at supermarket chains and other conventional retailers, according to data from Spins, a market research firm that tracks data from store scanners,.
For investors, the risk is that a hands-off approach to the way organic brands source ingredients and produce their food limits the ability of their corporate parent to cut costs, and reap greater profits. "These small companies are high growth, and they trade at pretty high multiples, but there's not that much they can do to take costs out of them because you can't integrate them into your business," said Dan Wald, a partner at Boston Consulting Group.
With a company that has unique ingredients, a separate supply chain and a different approach to marketing, "those really big drivers of cost reduction get pretty small quickly," Wald said. It can also create other types of tension. Applegate and Annie's Inc - the organic macaroni and cheese maker bought by General Mills - pledge not to use genetically modified ingredients and support labels on food that is GMO. Their parent companies oppose state labelling laws.
Getting onto the shelves of natural food retailers isn't the same as gaining space in supermarkets, a distribution channel that larger food manufacturers know well. Many stores have extensive product requirements and are vigilant about checking ingredients. While most won't remove a brand from stores just because it was acquired, there are exceptions.
For example, Brooklyn's Park Slope Food Coop won't carry Coke products because it believes the company has prohibited its workers from organising in certain countries outside the United States. When Coke bought a stake in Honest Tea in 2008 and eventually acquired the company, the Coop stopped carrying its products and found substitutes.
"Since we don't have anything owned by Coke, we have to keep an eye on what they are buying," said Ann Herpel, a manager at the Coop. Seth Goldman, co-founder and CEO of Honest Tea, said all of the company's bottled teas are now fair-trade certified, and that most other retailers that initially dropped the product had restored it.
"From our perspective, we've deepened or doubled down on the things that really defined our brand," he said. Larger food companies said they have changed their usual order of business to build ties with natural goods retailers. General Mills said it is using Annie's sales force and its third party broker Presence Marketing/Dynamic Presence to gain more shelf space for its other health-focused brands, such as Larabar energy bars and Food Should Taste Good snacks.
Meanwhile, Annie's says it has benefited from General Mills' knowledge in certain product categories like soup as well as its relationships with manufacturers. "The idea from the beginning was let's get everything we need from the mother ship and keep everything else away," said Annie's President John Foraker.
Indeed, General Mills Chief Executive Ken Powell said that the company learned over the years to take a hands-off approach with the natural and organic brands it acquires. "If we understand what they want and we give them what they want, we're fine," Powell said. That entails allowing Annie's management team to run the show, for the most part. "We leave them alone and let them chart the course for the brand," he said.
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