Washington Insider-- Monday

Competing Food Industry Trends

Here's a quick monitor of Washington farm and trade policy issues from DTN's well-placed observer.

Even After 13 Years, WTO's Azevedo Remains Optimistic About Doha Round

World Trade Organization Director-General Roberto Azevedo says he believes that members have turned a corner on the Doha Development Round negotiations that began in November 2001. Speaking last week with reporters, Azevedo said members have entered a new phase of the talks and that, "At this point in time the negotiations are changing gears very visibly, very clearly."

For the past seven years, members have generally rehashed old positions but, according to Azevedo, "That has clearly changed. Right now you will see a number of delegations exploring new approaches, suggesting new approaches. There have been new proposals put on the table. "

Among other things, WTO directors-general are part facilitator and part cheerleader for trade talks, and Azevêdo and his two predecessors –– Supachai Panitchpakdi (2002-2005) and Pascal Lamy (2005-2013) –– were nothing if not optimistic about the prospects for success for the Doha Round. However, it does appear now that the tone is changing and that there is the potential for the talks to finally achieve at least some of the ambitious goals first outlined in Doha, Qatar in November 2001.

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McConnell May Move Trade Promotion Bill After Spring Break

Congress is now out of town on a two-week spring break and when members return on April 13, the Senate will be in session for six consecutive weeks during which Majority Leader Mitch McConnell, R-Ky., says the chamber will try to move a number of high-priority pending measures.

McConnell says his top legislative priorities are gaining Trade Promotion Authority for the president and approving cybersecurity legislation. Speaking with reporters last week, McConnell said he remains encouraged that he has support from the Obama administration to move both items soon. Of the two items, McConnell suggested the TPA bill may move first this spring.

"I'm hoping the Finance Committee will be able to get Trade Promotion Authority out of committee very quickly after we come back," McConnell said. "It is a top priority for me. I've had a number of conversations with the president about it. It's a top priority for him. Hopefully, this is something we can do together." TPA is seen as a prerequisite for the United States being able to conclude trade deals currently being negotiated.

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But McConnell said the Senate likely will tackle some other items first, beginning with the human trafficking bill that stalled on the Senate floor before the current recess over a dispute about abortion language. Also awaiting action after the recess is the nomination of Loretta Lynch to serve as attorney general. Unless the two parties are able to agree on a way forward on these and other issues, the six-week session could fly by quickly with little to show for it.

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Washington Insider: Competing Food Industry Trends

The urban press is a careful observer of food industry trends, in part because these have an effect on advertising but also because urban readers seem to care a lot about them. So, there is strong interest in developments in various niche and not-so-niche food markets. Even the Wall Street Journal spent a significant amount of space describing these changes recently.

The urbans have long been fascinated by the growth of the organics market, and a recent WSJ story focused on the success of smaller companies in gaining shelf space in large retail stores — the result of shifts in tastes among consumers “distrustful of established food giants' products and ingredients,” the Journal says. The rise of these smaller companies attracting consumers from brands that for decades were commonplace in American kitchens, like Kraft Foods's macaroni and cheese and Kellogg's breakfast cereals.

The latest example of the trend came last week when Heinz, two years after being taken over by Brazilian private-equity firm 3G Capital Partners, announced that it will acquire Kraft in a deal valued at around $49 billion. The idea is to use 3G’s management expertise to build on the many well-known brands owned by Heinz and Kraft and revive growth.

The 25 biggest U.S. food and beverage companies together accounted for just over 45% of the industry's $418 billion in 2014 sales, down 4.3 points from five years earlier, the WSJ says. Smaller brands' share rose to 35.3% from 32.1% in the period, with the rest going to companies that produce store-brands for big grocers.

A number of smaller companies did especially well. For example, granola bar maker Kind LLC, started in 2004, has gone from less than 0.5% share of the snack-bar market in 2011 to nearly 6% today. Chobani Inc., whose Greek-style yogurt revolutionized that sector, reached $1 billion in sales its first five years of sales. There are many more such cases.

One big reason is the growing interest from retailers who traditionally have worked closely with giant national brands who spend heavily on advertising and pay for prime shelf space. Now many retailers are seeking out upstarts to spice up their aisles, the Journal notes.

For example, Kroger, the biggest conventional grocery chain, with over $100 billion in sales last year, began selling FlapJacked pancake mix from a small Colorado company. It introduced the product in its King Soopers chain in Colorado. After helping develop a new package size, marketing strategy and additional flavors, Kroger now sells FlapJacked foods in more than 500 stores across the country. "Our customers are increasingly telling us that buying local or buying from boutique producers is something they want, and we are working even harder to provide it," a Kroger spokesman told the Journal.

The WSJ sees this as a major trend, and concludes that “Being big used to be an advantage, with a bigger marketing budget and buying supplies in bulk. Now it's a hurdle. Big companies are responding by acquiring the upstarts, or rolling out new products to try to compete with them.”

"We are well aware of the mounting distrust of Big Food," Campbell Soup CEO Denise Morrison said last month.

Winning back consumer trust is proving hard for the incumbents. "The biggest challenge is that they are prisoners of their own heritage," said a spokesman for of Credit Suisse — who sees “Organic Velveeta” as a contradiction in terms.

Smaller companies make up for their lack of financial resources with greater agility and a lack of historical baggage. "New brands have a blank sheet of paper for telling their story. Established brands have to work against negative perceptions," said David Garfield, a consultant with AlixPartners. However, rapid growth brings challenges as well.

Alison Bailey Vercruysse, founder and chief executive of 18 Rabbits, a San Francisco-based maker of granola and granola bars, turned to an outside food manufacturer to help her ramp up production. But the facility repeatedly failed to deliver on schedule. Although she once had her products in 80% of Whole Foods stores around the country, the bulk of that market was lost by poor performance. "Since we didn't have our own production capabilities, that almost killed us as a company," she said.

Now using a different producer, the company is offering an 18 Rabbits Jr. granola line targeted at children through Target. "It took two years to bounce back" from the outsourcing stumble, she said. "2016 will be break-even."

Clearly, the food industry is in flux these days, and sharp changes are likely to be the norm for some time to come. At the same time, observers note that consumers still care a lot about prices and that the “image” marketers are playing a fairly dangerous game, with the outcome still somewhat in doubt. Clearly, these are trends and market battles producers should watch carefully as they develop, Washington Insider believes.


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(GH/CZ)

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