Are challenger food & beverage brands living up to their early promise?

15-Jun-2018 - Last updated on 15-Jun-2018 at 22:53 GMT

US packaged food companies have been “frantically buying up new challenger brands at escalating deal multiples to offset the weakening sales trends in their core businesses,” says a new report from Bernstein. But success rates have been hit and miss, with several high profile acquisitions losing momentum in 2017/18.

Several high-profile challenger brands that were acquired by big food companies in recent years have seen sales growth turn negative this year, said Bernstein analysts in a note to investors this week entitled, ‘Are challenger brands still a challenge?’

Predicting a “shake-out period, similar to what has happened in the craft beer market,” it predicts that challenger brands will “continue to take share from established food brands as consumers increasingly demand healthier, fresher options” but expects the growth of food startups to “slow down as venture funding becomes more selective.”

According to Nielsen data crunched by Bernstein (which excludes sales in online and natural channels):

Annie’s (General Mills) “recently saw its sales growth turn negative in measured channels in 2018.”
Brookside (Hershey) has seen its market share drop from 2% at its peak back down to 0.5%.
KRAVE Jerky (Hershey) “experienced a sharp decline in sales growth in measured channels as distribution gains lost momentum in 2017.”
Enjoy Life Foods (Mondelez International) “results today are lackluster”
Should Taste Good (General Mills) “has seen its sales falter in measured channels along with the loss of distribution points, starting in late 2015.”
Epic Provisions (General Mills) is still growing, but “sales and distribution growth have somewhat normalized.”
Plum Organics (Campbell Soup) “saw its sales growth turn negative in measured channels in mid-2017.”

Annie's, acquired by General Mills in late 2014 for a jaw-dropping $820m, “recently saw its sales growth turn negative in measured channels in 2018 as distribution flatlined,” noted Bernstein.

While Brookside initially looked promising for Hershey when it was acquired in late 2011 and took close to 2% of market share in the US chocolate category at its peak, the brand is “now back down to below 0.5% market share in measured channels and sales growth has turned negative since distribution began to falter in early 2016.

"This is most likely as competition in premium chocolate intensified as new super-premium brands entered the market,” added Bernstein.

Losing momentum?

Allergen-friendly brand Enjoy Life Foods did well initially for new parent Mondelez International as distribution scaled, it added, but “results today are lackluster.”

Food Should Taste Good – acquired by General Mills in 2012 – “has seen its sales falter in measured channels along with the loss of distribution points starting in late 2015,” noted Bernstein, while Plum Organics, which Campbell acquired in 2013, saw its sales growth turn negative in measured channels in mid-2017.

KRAVE Jerky, acquired by Hershey in 2015, “also experienced a sharp decline in sales growth in measured channels as distribution gains lost momentum in 2017,” added the analysts.

Hershey has adapted to operate newly acquired businesses as independent units

Among the challenger brands acquired by major US food companies in recent years that Bernstein analyzed, only two - barkTHINS (Hershey) and Epic Provisions (General Mills) - are still experiencing positive sales growth in measured channels today, it claimed.

“Both companies were acquired in 2016 and there still appears to be some room for distribution to grow. However, as distribution growth runs out of steam, it is unclear if their growth can be sustained.

“Having learned from the mistakes made with Brookside and KRAVE, Hershey has adapted to operate newly acquired businesses as independent units and to implement more precision-based marketing and distribution strategies instead of over-extending distribution on new products.”

“We believe a slowdown in early-stage venture capital funding has led to the decline in the number of challenger brands we've seen recently," said Bernstein analysts, although corporate finance sources contacted by FoodNavigator-USA said they did not recognize this picture, and claimed that if anything, CPG investing rates were accelerating as there continues to be more interest in food and ag from the broader investment community.